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  1. Chapter 16 Wages and Employment: Monopsony and Labor Unions

  2. Economic Principles • The market supply curve of labor facing the monopsonist • The monopsonist’s marginal labor cost curve • The supply curve of labor offered by the union Gottheil - Principles of Economics, 4e

  3. Economic Principles • The marginal labor cost generated by the union’s supply curve of labor • Collective bargaining between the union and monopsonist over wages and employment • The union’s decision to strike Gottheil - Principles of Economics, 4e

  4. Monopsony: When There’s Only One Buyer of Labor Monopsony • A labor market with only one buyer. Gottheil - Principles of Economics, 4e

  5. Monopsony: When There’s Only One Buyer of Labor Suppose that there is one large mining firm that is buying up all the other mining firms in Harlan County, Kentucky. Gottheil - Principles of Economics, 4e

  6. Monopsony: When There’s Only One Buyer of Labor As ownership of a firm changes hands, the workers may notice little difference—their wage may remain the same and the work they perform may also remain unchanged. Gottheil - Principles of Economics, 4e

  7. Monopsony: When There’s Only One Buyer of Labor Real change may be imminent, however, as both the firm and the workers realize the number of employers in a region is shrinking. Gottheil - Principles of Economics, 4e

  8. Monopsony: When There’s Only One Buyer of Labor Under perfect competition, individual firms must accept the wage rate determined by the market. Gottheil - Principles of Economics, 4e

  9. Monopsony: When There’s Only One Buyer of Labor Under monopsony, the firm can choose the wage rate it wants. Gottheil - Principles of Economics, 4e

  10. EXHIBIT 1 SUPPLY CURVE OF LABOR FACING A MONOPSONIST Gottheil - Principles of Economics, 4e

  11. Exhibit 1: Supply Curve of Labor Facing a Monopsonist How many laborers are willing to work at a wage rate of $10 per hour in Exhibit 1? • At $10 per hour, the quantity of labor supplied is 3,000. Gottheil - Principles of Economics, 4e

  12. Monopsony: When There’s Only One Buyer of Labor When determining what wage rate to pay, the firm must compare each wage rate and the corresponding marginal labor cost. Gottheil - Principles of Economics, 4e

  13. Monopsony: When There’s Only One Buyer of Labor If a firm decides to increase the wage rate in order to attract more laborers, it must increase the wage rate of all employees—even those that were willing to work for a lower wage rate. Gottheil - Principles of Economics, 4e

  14. Monopsony: When There’s Only One Buyer of Labor The marginal labor cost includes both the wages of the additional laborers as well as the cost of bumping up the wage rates of all the other laborers. Gottheil - Principles of Economics, 4e

  15. Monopsony: When There’s Only One Buyer of Labor As more laborers are hired at a higher wage rate, the labor supply curve and marginal labor cost curve begin to diverge. Gottheil - Principles of Economics, 4e

  16. EXHIBIT 2A RELATIONSHIP BETWEEN THE MLC CURVE AND THE SUPPLY CURVE OF LABOR Gottheil - Principles of Economics, 4e

  17. EXHIBIT 2B RELATIONSHIP BETWEEN THE MLC CURVE AND THE SUPPLY CURVE OF LABOR

  18. Exhibit 2: Relationship Between the MLC Curve and the Supply Curve of Labor 1. Why does the MLC curve lie above the labor supply curve in Exhibit 2? • When the monopsonist increases employment, it must not only offer a higher wage rate to attract more workers but also raise the wage rate of those already working. Gottheil - Principles of Economics, 4e

  19. Exhibit 2: Relationship Between the MLC Curve and the Supply Curve of Labor 2. What happens when the company increases the wage rate from $6 to $8? • Going from $6 to $8, the firm hires an additional 1,000 miners for a total of 2,000 miners. Gottheil - Principles of Economics, 4e

  20. Exhibit 2: Relationship Between the MLC Curve and the Supply Curve of Labor 2. What happens when the company increases the wage rate from $6 to $8? • The Total Labor Cost = ($8 × 2,000) = $16,000. This is an increase of $10,000 over the total labor cost at the previous wage rate. Gottheil - Principles of Economics, 4e

  21. Exhibit 2: Relationship Between the MLC Curve and the Supply Curve of Labor 2. What happens when the company increases the wage rate from $6 to $8? • The 1,000 additional miners end up costing the firm $10,000 or ($10,000/1,000 miners) = $10 per hour per worker. This is the marginal labor cost. Gottheil - Principles of Economics, 4e

  22. Exhibit 2: Relationship Between the MLC Curve and the Supply Curve of Labor 2. What happens when the company increases the wage rate from $6 to $8? • Even though each worker receives only an $8 wage rate, they each add $10 to the firm’s labor cost. Gottheil - Principles of Economics, 4e

  23. Choosing the Employment/Wage Rate Combination In order to determine how many additional laborers to hire, the firm follows the revenue-maximizing rule. Gottheil - Principles of Economics, 4e

  24. Choosing the Employment/Wage Rate Combination The revenue-maximizing rule: • Continue to hire laborers as long as MRP > MLC. Stop hiring laborers when MRP = MLC. Gottheil - Principles of Economics, 4e

  25. Choosing the Employment/Wage Rate Combination Under Monopsony • In competitive labor markets, the wage rate equals MRP. • In monopsony, the wage rate is below MRP. Gottheil - Principles of Economics, 4e

  26. Choosing the Employment/Wage Rate Combination Under Monopsony Return to monopsony power • The difference between the MRP and the wage rate of the last worker hired, multiplied by the number of workers hired. Gottheil - Principles of Economics, 4e

  27. Choosing the Employment/Wage Rate Combination Under Monopsony Return to monopsony power • Workers argue that the return would belong to them if the labor market were competitive. Gottheil - Principles of Economics, 4e

  28. EXHIBIT 3A DETERMINING THE WAGE RATE, EMPLOYMENT, AND RETURN TO MONOPSONY POWER

  29. EXHIBIT 3B DETERMINING THE WAGE RATE, EMPLOYMENT, AND RETURN TO MONOPSONY POWER

  30. Exhibit 3: Determining Wage Rate, Employment and Return to Monopsony Power 1. Where does MRP equals MLC is Exhibit 3? • MRP = MLC at $26 and 6,000 miners. Gottheil - Principles of Economics, 4e

  31. Exhibit 3: Determining Wage Rate, Employment and Return to Monopsony Power 2. What is the wage rate when MRP equals MLC? • The wage rate is determined by reading the labor supply curve at 6,000 miners. Gottheil - Principles of Economics, 4e

  32. Exhibit 3: Determining Wage Rate, Employment and Return to Monopsony Power 2. What is the wage rate when MRP equals MLC? • The wage rate at 6,000 miners is $16. This is $10 below the workers’ MRP of $26. Gottheil - Principles of Economics, 4e

  33. Exhibit 3: Determining Wage Rate, Employment and Return to Monopsony Power 3. What is the return to monopsony power that the firm is able to capture? • Monopsony returns = (MRP - W) ×L= ($26-$16) × 6,000 = $60,000. Gottheil - Principles of Economics, 4e

  34. Enter the United Mine Workers’ Union Labor union • An association of workers, each of whom transfers the right to negotiate wage rates, work hours, and working conditions to the association. Gottheil - Principles of Economics, 4e

  35. Enter the United Mine Workers’ Union Labor union • In this way, the union presents itself as a single seller of labor on the labor market. Gottheil - Principles of Economics, 4e

  36. Enter the United Mine Workers’ Union • Workers must agree to not work for less than the prescribed wage rate. • Therefore, the union’s labor supply curve is horizontal at that wage rate. Gottheil - Principles of Economics, 4e

  37. EXHIBIT 4A THE UNIONIZED LABOR MARKET Gottheil - Principles of Economics, 4e

  38. EXHIBIT 4B THE UNIONIZED LABOR MARKET

  39. Exhibit 4: The Unionized Labor Market How many laborers will the firm hire under the unionized labor market in Exhibit 4? • The firm will continue to use the revenue-maximizing rule and hire laborers until MRP = MLC. Gottheil - Principles of Economics, 4e

  40. Exhibit 4: The Unionized Labor Market How many laborers will the firm hire under the unionized labor market in Exhibit 4? • As before, MRP = MLC at 6,000 laborers. The wage rate now, however, is $26. This is the full value of the laborers’ MRP. Gottheil - Principles of Economics, 4e

  41. Enter the United Mine Workers’ Union One problem created when the union forces the firm to pay a wage rate equal to the workers’ MRP is that under the higher wage rate, more people are willing to work. Gottheil - Principles of Economics, 4e

  42. Enter the United Mine Workers’ Union For example, if 6,000 people were willing to work at the wage rate of $16, 11,000 people may be willing to work for the unionized wage rate of $26. Gottheil - Principles of Economics, 4e

  43. Enter the United Mine Workers’ Union The union must find a way to control its labor supply; otherwise the excess supply will undo its collective strength. Gottheil - Principles of Economics, 4e

  44. Enter the United Mine Workers’ Union Collective bargaining • Negotiation between a labor union and a firm employing unionized labor, to create a contract concerning wage rates, hours worked, and working conditions. Gottheil - Principles of Economics, 4e

  45. Enter the United Mine Workers’ Union Strike • The withholding of labor by a union when the collective bargaining process fails to produce a contract that is acceptable to the union. Gottheil - Principles of Economics, 4e

  46. Enter the United Mine Workers’ Union Strikes are not pleasant for the laborers or the firm. • The laborers earn no income. • In the absence of replacement workers, the firm earns no revenue. Gottheil - Principles of Economics, 4e

  47. Enter the United Mine Workers’ Union • Neither the laborers nor the firm can survive a strike forever. • It is only by reassessing each other’s ability to tolerate the damaging effects of the strike that the impasse can be broken. Gottheil - Principles of Economics, 4e

  48. Higher Wage Rate Versus More Employment Improved technology or an increase in the price of a product may cause the laborers’ MRP curve to shift to the right (MRP’). Gottheil - Principles of Economics, 4e

  49. Higher Wage Rate Versus More Employment There are two options available with the new MRP′ curve: • Hire more laborers and increase the wage rate a small amount. • Hire the same number of laborers and increase the wage rate by a larger amount. Gottheil - Principles of Economics, 4e

  50. Higher Wage Rate Versus More Employment There are several methods the union can use to control the labor supply: • Discourage replacements for workers who are retiring. • Create long apprenticeship periods. • Impose high initiation fees. • Retrain and relocate laborers. Gottheil - Principles of Economics, 4e