1. Labor Markets and Labor Unions
Chapter 12
Labor Markets and Labor Unions
© 2006 Thomson/South-Western

2. Three Uses of Time Individuals can use their time in three ways
Undertake market work  selling time in the labor market in return for income
Undertake nonmarket work  using time to produce their own goods and services
Spend time as leisure  all nonwork uses of their time

3. Work and Utility
Work is not a pure source of utility, rather it is a source of disutility  the opposite of utility
Net utility of work -- the utility of consumption made possible through work minus the disutility of the work itself; usually makes some amount of work an attractive use of part of an individual’s time
In the case of market work, the individual’s income buys goods and services

4. Utility Maximization
Within the limits of a 24-hour day, seven days a week, individuals can balance their time among market work, nonmarket work, and leisure in order to maximize utility
The rational consumer will attempt to maximize utility by allocating time so the expected utility of the last unit of time spent in each activity is identical

5. Implications
The higher your market wage, other things constant, the higher your opportunity cost of leisure and nonmarket work
The higher the expected earnings right out of high school, other things constant, the higher the opportunity cost of attending college

6. Wages and Individual Labor Supply
An increase in the wage affects an individual’s choice between market work and other uses of time in two ways:
Substitution Effect
Income Effect
As wage increases, market work is substituted for other activities  substitution effect of a wage increase

7. Income Effect
A higher wage means a higher income for the same number of hours, so demand for all normal goods increases
Leisure is a normal good, so higher income increases the demand for leisure and the allocation of time to market work declines
The income effect of a wage increase tends to reduce the quantity of labor supplied to market work

8. Exhibit 1: Individual Labor Supply Curve for Market Work
The individual supply curve slopes upward until a wage of $12 is reached: at $12, the substitution effect dominates – the quantity of labor supplied increases
After a wage of $12, the labor supply curve bends backward and the income effect dominates – the quantity of labor supplied decreases

9. Nonwage Determinants of Labor Supply
Supply of labor to a particular market depends on a variety of factors other than the wage
Other sources of income
Nonmonetary factors
Value of job experience
Taste for work

10. Other Sources of Income
The willingness to supply time to a labor market depends on income on other sources, including prior savings, borrowing, family support, and similar sources
More generally, wealthy people have less incentive to work

11. Nonmonetary Factors
Difficulty of the job: the more difficult the job, the higher the wage must be, all other things being equal
Quality of the work environment: the more attractive the working conditions, the more labor an individual will supply to that particular market, other things constant
Status of the position: the higher the status, the more labor an individual will supply to that market, other things constant

12. Exhibit 2: Market Labor Supply Curve
The labor supply curves of different individuals do not bend backwards at the same time – here we have three individual supply curves that sum to a market supply curve that slopes upward over the realistic range of wages

13. Why Wages Differ
Wage differences across markets trace to differences in a number of factors
Differences in training, education, age, and experience
Differences in ability
Differences in risk
Geographic differences
Job discrimination
Union membership

14. Exhibit 3 Average Hourly Wage By Occupation

15. Why Wages Differ Training, Education, Age, and Experience
Some jobs pay more because they require a long and costly training period
Fewer individuals are willing to incur the time and expense required
Results in a smaller market supply
However, extensive training increases the productivity of labor
There is increased demand for these skills

16. Exhibit 4 Age, Education, and Pay

17. Why Wages Differ Differences in ability Ability Risk Geographics
Job discrimination
Union membership

18. Types of Unions
A labor union is a group of workers who join together to improve their terms of employment
Craft unions are confined to those with a particular skill, or craft
Industrial unions include unskilled, semiskilled, and skilled workers in a single industry, such as all autoworkers or all steelworkers.

19. Collective Bargaining
Process by which representatives of union and management negotiate a mutually agreeable contract specifying wages, employee benefits, and working conditions
Mediator
An impartial observer who listens to both sides separately and then suggests how each side could adjust its position to resolve differences
Binding arbitration
Process whereby a neutral third party evaluates both sides of the dispute and issues a ruling that both parties must accept

20. The Strike
A strike is a union’s attempt to withhold labor from the firm
Purpose of a strike is to stop production, thereby forcing the firm to accept the union’s position
Strikes also impose significant costs on union members

21. Union Wages and Employment
A menu of union desires includes higher wages, more benefits, greater job security, better working conditions, and so on
Three ways that a union can try to increase wages
By forming an inclusive, or industrial, union
By forming an exclusive, or craft, union
By increasing the demand for union labor

22. Exhibit 5: Effect of a Union’s Wage Floor
In the absence of a union, equilibrium wage is W and equilibrium employment level is E.
At the market wage, individual employers face a horizontal, or perfectly elastic, supply of labor, s.
(a) Industry
(b) Firm
Wage rate S
Wage rate W W s D
d = Marginal
revenue product E
Labor per period e
Labor per period
Each firm can hire as much labor as it wants at the market wage of W
A firm hires up to the point where labor’s marginal revenue product equals its marginal resource cost, quantity e

23. Exhibit 5: Effect of a Union’s Wage Floor
If the union negotiates a wage above the market-clearing wage at W‘, no labor will be supplied at a lower wage. In effect, the supply of union labor is perfectly elastic at the union wage out to point a.
If more than E'‘ workers are demanded, the wage floor no longer applies and the upward-sloping portion, aS, becomes the relevant part of the labor supply curve W'aS.
(a) Industry
(b) Firm S a
Wage rate W'
Wage rate W' s' W W s D
d = Marginal
revenue product E
E''
Labor per period e
Labor per period
For an industry facing a wage floor of W', the entire labor supply curve is W'aS ,which has a kink where the wage floor joins the upward-sloping portion of the original supply curve.

24. Exhibit 5: Effect of a Union’s Wage Floor
Once this wage floor has been established, each firm faces a horizontal supply curve of labor at the collectively bargained wage, W’. Since the wage is now higher, the quantity of labor demanded by each employer declines from e to e' as seen in the right panel.
(a) Industry
(b) Firm S a W' W' s'
Wage rate
Wage rate W W s D
d = Marginal
revenue product E' E
E''
Labor per period e' e
Labor per period
The higher wage leads to a reduction in total employment as shown by the decline from E to E' in the left panel. Each firm faces a horizontal supply curve of labor at the collectively bargained wage  quantity of labor demanded by each employer declines from e to e’

25. Exhibit 5: Effect of a Union’s Wage Floor
At wage W’, the amount of labor that workers would like to supply, E”, exceeds the amount demanded, E’. In the absence of a union, this excess quantity of labor supplied would cause unemployed workers to lower their asking wage. With a union, workers cannot offer to work for less, nor can employers hire them at a lower wage.
(a) Industry
(b) Firm S a W' W' s'
Wage rate
Wage rate W W s D
d = Marginal
revenue product E' E
E''
Labor per period e' e
Labor per period
Because of the excess quantity of labor supplied, the union must somehow ration available jobs, such as awarding jobs based on worker seniority or connections with the union

26. Effect of Union Wage Floor
With the inclusive, or industrial, union the wage rate is higher and total employment lower than would be in the absence of a union
Those who cannot find union employment will look for jobs in the nonunion sector, causing the nonunion wage to be driven downward
Wages are relatively higher in the union sector for two reasons
Unions bargain for wage higher than the market-clearing wage
Those unable to find employment in the union sector crowd into the nonunion sector

27. Exhibit 6 Median Weekly Earnings Are Higher for Union Than Nonunion Workers

28. Exhibit 7a: Effect of Reducing Labor Supply
A successful supply restriction would be shown as the leftward shift from S to S'.

29. A successful supply restriction
Reducing Labor Supply
A successful supply restriction
Requires that the union:
limit its membership
force all employers in the industry to hire only union members – a craft union
Membership can be restricted with high initiation fees, long apprenticeship periods, difficult qualification exams, and other devices
Defended on the grounds that they protect the public

30. Exhibit 7b: Effect of Increasing Labor Demand
Third way of increasing wages is if the union can somehow increase the demand for labor by causing the demand curve to shift from D to D“
This is a more attractive alternative because it increases both the level of employment – E to E''– and the wage rate – W to W' – there is no need to ration jobs among union members

31. Increasing the Demand for Labor
Increase demand for union-made goods
Restrict supply of nonunion-made goods
Increase productivity of union labor
Some claim that unions increase worker productivity by minimizing conflicts, resolving differences, and monitoring workers
If this is indeed true, the demand for union labor should increase
Featherbedding

32. Featherbedding
Union efforts to force employers to hire more workers than wanted or needed
Does not create a true increase in the demand, in the sense of shifting the demand curve to the right
Instead, forces firms to hire more labor than they really want or need, thus moving the firm to a point to the right of its true labor demand curve

33. Recent Trends in Union Membership
In 1955, about one-third of wage and salary workers belonged to unions, now only one in seven belongs to a union
Government workers make up nearly half of all union members
Compared with other industrialized countries, the U.S. ranks relatively low in terms of unionization

34. Recent Trends in Union Membership
Union membership rates vary greatly across states
Rates tend to be highest in the Northeast United States and lowest in the South
Decline in union membership is due partly to structural changes in the U.S. economy
Employment in the industrial sector has been declining, and increasing in the service sector
Growth in foreign competition
Near disappearance of strikes

35. Exhibit 8 Unionization Rates by Age and Gender