1. MT445 W6 Seminar Labor Markets and Labor Unions

2. S Labor Supply Individual labor supply curve for unskilled work 2 2004030486055 Hours of labor per week $14 13 11 12 9 10 7 8 Wage rate per hour Substitution effect outweighs the income effect : quantity of labor a worker supplies increases with the wage Above some wage, shown here at $12 per hour, the income effect dominates: S curve bends backward. Further increases in the wage reduce the quantity of labor supplied

3. Market labor Supply Deriving the market labor supply curve from individual labor supply curves 3 Wage rate Labor0 SASA (a) Individual A Labor0 SBSB (b) Individual B Labor0 SCSC (c) Individual C Labor0 S (d) Market supply

4. Wages differ Average hourly wage by occupation, U.S, May 2006 4

5. Exhibit 4 Age, education, and pay 5 Age Group Average Yearly Earnings (thousands) No high school diploma High school diploma Bachelor’s degree Professional degree

6. W6 Assignment Q1 6 How can we measure the opportunity cost of leisure? Why is the supply curve for labor usually upward sloping? The opportunity cost of leisure is foregone wages. Opportunity cost is what that resource could earn in its best alternative use. Economic Rent is the portion of a resource’s total earnings that exceeds its opportunity cost. The supply curve for labor is upward sloping because as wage rates climb, workers are willing to work more; the opportunity cost of leisure is higher, so workers substitute away from the more expensive good (leisure). This is the substitution effect. It is possible, however, that the income effect may also play a role in the amount of labor supplied. As wage rates increase, workers can work less and earn the same amount of income. If this is the case, workers will work less, and the supply curve will be flatter.

7. S s Unions Effects of labor union’s wage floor 7 No union: market wage is W. Each firm can hire as much labor as it wants. The firm hires more labor until MRP=W: e units of labor; industry employment is E. (a) Industry Wage rate W’ W (b) Firm D Wage rate W’ W d=Marginal revenue product Labor per period e0 e’ Labor per period E0 E’’ E’ s’ a Union negotiates wage W’, above the market wage W; the supply curve facing the firm shifts up from s to s’. Each firm hires less labor, e’; industry employment falls to E’; excess quantity of labor supplied = E’’-E’.

8. Unions are more successful at raising wages in less competitive markets Median weekly earning are higher for union than nonunion workers 8

9. D’’ S’ Unions can restrict labor supply Effect of reducing labor S or increasing labor D 9 S S If a union can successfully restrict labor supply in an industry, the supply curve shifts from S to S’. Wage: rises from W to W’ Employment: drops from E to E’. (a) Reducing labor supply Wage rate W’ W (b) Increasing labor demand D Wage rate W’’ W D Labor per period E’’0 E Labor per period E0E’ If a union can increase the demand for union labor, the demand curve shifts from D to D’’. Wage: raises from W to W’’ Employment: raises from E to E’’.

10. W6 Assignment Ch12 Q12 10