1. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 1 ECON Designed by Amy McGuire, B-books, Ltd. McEachern 2008-2009 12 CHAPTER Labor Markets and Labor Unions Micro

2. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 2 Labor Supply LO 1  Individual labor supply –Willing and able –Many possible uses –Over the realistic range of wages –Depends on Abilities Tastes Opportunity cost

3. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 3 Labor Supply and Utility Maximization LO 1  Utility –Goods and services –Leisure Normal good Diminishing marginal utility  Three uses of time –Market work –Nonmarket work –Leisure

4. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 4 Labor Supply and Utility Maximization LO 1  Market and nonmarket work –Disutility –Increasing marginal disutility –Net utility of work  Maximize utility –Allocate time: expected MU of last unit spent in each activity is identical

5. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 5 Wages and Individual Labor Supply LO 1  Substitution effect of wage increase –Increased opportunity cost of Leisure; nonmarket work –Substitute market work for other activities –Increase Q supplied to market work  Income effect of wage increase –Higher income Increased D for normal goods: leisure –Reduce Q supplied to market work

6. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 6 Exhibit 1 LO 1 Individual Labor Supply Curve for Unskilled Work S 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

7. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 7 Wages and Individual Labor Supply LO 1  Individual labor supply –Backward bending –Income effect of higher wage Eventually dominates substitution effect  Flexibility of hours worked –Part-time; overtime –Timing and length of vacation –School –Retire

8. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 8 Nonwage Determinants of Labor Supply LO 1 –Other sources of income –Nonmonetary factors Difficulty of the job Quality of work environment Status of the position –Value of job experience –Taste for work  Market supply of work –Horizontal sum of all the individual supply curves

9. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 9 Exhibit 2 LO 2 Deriving the Market Labor Supply Curve from Individual Labor Supply Curves Wage rate Labor0 SASA (a) Individual A Labor0 SBSB (b) Individual B Labor0 SCSC (c) Individual C Labor0 S (d) Market supply

10. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 10 LO 2 Why Wages Differ  Differences in  Training, Education, Age  Experience  Ability  Risk  Geographic differences  Discrimination  Union membership

11. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 11 Exhibit 3 LO 2 Average Hourly Wage by Occupation, U.S, May 2006

12. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 12 Exhibit 4 LO 2 Age, Education, and Pay

13. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 13 LO 2 Case Study Winner-Take-All Labor Markets  Key individuals  Critical to success  Richly rewarded  Generate a high MRP  Initially  Entertainment and pro sports  Now  Management, law, banking, finance, academia

14. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 14 Unions and Collective Bargaining LO 3  Labor union –Group of workers –Join to improve terms of employment  Craft union –Particular skill, craft  Industrial unions –Unskilled, semiskilled, and skilled workers in an industry

15. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 15 Collective Bargaining, Mediation, Arbitration LO 3  Collective bargaining –Negotiation; Mutually agreeable contract  Mediation –If negotiations reach an impasse –Public interest  Arbitration - Neutral third part –Evaluates –Issues a ruling  Strike –Major source of union power

16. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 16 LO 4  Union desires Higher wages More benefits Greater job security Better working conditions  Unions can increase wages –Inclusive (industrial) union –Exclusive (craft) union –Increase D for union labor Union Wages and Employment

17. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 17 LO 4  Union: –Negotiate industry-wide wages for each class of labor Higher wage (wage floor) Lower employment  Non-union sector –Increased supply –Lower wages Inclusive, or Industrial Unions

18. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 18 Exhibit 5 LO 4 Effects of Labor Union’s Wage Floor S s (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 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. 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’.

19. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 19 Exhibit 6 LO 4 Median Weekly Earning are Higher for Union Than Nonunion Workers

20. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 20 LO 4  Reduce the labor supply –Restrict union membership Higher initiation fees Longer apprenticeship periods Tougher qualification exams More restrictive licensing requirements –Force all employers in the industry to hire only union members –Higher wage –Lower employment Exclusive, or Craft Unions

21. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 21 LO 4  Increase demand for union-made goods –Derived demand  Restrict supply of nonunion-made goods –Derived demand  Increase productivity of union labor  Featherbedding –Forcing employers to hire more union workers than they want or need Increasing Demand of Union Labor

22. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 22 Exhibit 7 LO 4 Effect of Reducing Labor Supply or Increasing Labor Demand 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’. 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’’.

23. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 23 LO 4  1955 –35% of US workers in unions  2006 –12% of US workers in unions –More right-to-work states –Structural changes in U.S. economy –Growth in market competition –Declined number of strikes Recent Trends in Union Membership

24. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 24 Exhibit 8 LO 4 Unionization Rates by Age and Gender

25. Chapter 12Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved 25 LO 4 Case Study Dock Unions Thrive  Two longshoremen unions  100,000 members  Salary: $120,000/year  Technology  Skilled crane workers  Computer tracking