1. Chapter 12 Labor Markets and Labor Unions © 2009 South-Western/ Cengage Learning

2. S Exhibit 1 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. Wages and Individual Labor Supply 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 3

4. Nonwage Determinants of Labor Supply –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 4

5. Exhibit 2 Deriving the market labor supply curve from individual labor supply curves 5 Wage rate Labor0 SASA (a) Individual A Labor0 SBSB (b) Individual B Labor0 SCSC (c) Individual C Labor0 S (d) Market supply

6. Why Wages Differ Differences in –Training, Education, Age –Experience –Ability –Risk Geographic differences Discrimination Union membership 6

7. S s Exhibit 5 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’.