Weeks 12+13

Assume that the union has enough negotiating power to raise the wage to $4 per hour higher than it would otherwise be. Is there now excess demand or excess supply of labor? (refer to table) (12.2)

If the union has enough negotiating power to raise the wage to $4 per hour higher than under the original equilibrium, the new wage would be $22 per hour. At this wage, 4,000 workers would be demanded while 10,000 would be supplied, leading to an excess supply of 6,000 workers.

competitive labor market (12.1)

- A competitive labor market is characterized by the many employers that compete for a specific type of labor and the many workers with identical skills that supply that type of labor. - Individual employers are therefore "wage takers," that is, an individual firm's labor supply is perfectly elastic at the market wage rate. - Firms use the MRP = MRC rule to determine employment at market wage.

labor market (video) (12.1)

the market for jobs where workers provide the supply and employers the demand

equilibrium wage (video) (12.1)

wage determined by the interaction of demand and supply in a competitive market

So, do unions work? (12.2)

Well, wages increase, but there are less employed. That works as a barrier to unions asking for the highest wage possible. If they go too high in their request, then even more members would become unemployed, and the members will not allow that.

key ideas (12.1)

- A firm demands labor because of the value of the labor's marginal productivity. - For a firm operating in a perfectly competitive output market, this will be the value of the marginal product, which we define as the marginal product of labor multiplied by the firm's output price. - Profit maximizing firms employ labor up to the point where the market wage is equal to the firm's demand for labor. - In a competitive labor market, we determine market wage through the interaction between the market supply and market demand for labor.

monopsony (12.2)

- A labor market where there is only one employer. - In a monopsony market, there is only one buyer for labor. - The workers who provide the type of labor needed have few employment options other than working for the monopsony, maybe because they are geographically immobile or their skills are not transferable to other jobs - For example, in the late 1990s and early 2000s, how many hospitals did Fredericksburg have? If you said one, you are correct. - That hospital was Mary Wash. If you were a nurse or doctor, you could choose to commute to Richmond or DC, but after a 12 hour shift, would you really want to? - You would choose to work for Mary Wash, and take the lower wage that they offered because they were a "wage maker," meaning that the wage rate it must pay varies directly with the number of workers available. - In this case, the firm's labor supply curve will be upward-sloping and the MRC will be higher than the wage rate. - To maximize profit, they will employ the quantity of labor at which MRC=MRP.

key ideas (12.2)

- A monopsony is the sole employer in a labor market. - The monopsony can pay any wage it chooses, subject to the market supply of labor. - To maximize profits, a monopsonist will hire workers up to the point where the marginal cost of labor equals their labor demand. - This results in a lower level of employment than a competitive labor market would provide, but also a lower equilibrium wage.

minimum wage cont. (13.1)

- Critics argue that the minimum wage, if it is above the equilibrium wage rate, will cause employers to hire fewer workers and may even force some firms out of business since they cannot afford to pay the higher rate. - They also argue that many of the workers who receive this minimum rate, such as teenagers, do not actually live in impoverished households and are not self-supporting so do not need a guaranteed minimum. - Advocates of minimum wage argue that in many low-pay labor markets, employers exercise monopsonistic power and thus a required minimum wage can increase wage rates without causing significant unemployment. - There is no clear answer as to which view is correct. On the one hand, the employment and unemployment effects of the minimum wage do not appear to be as great as many critics fear. On the other hand, the minimum wage is not as strong an antipoverty tool as supporters contend since a large part of its effect is dissipated on non-poverty families.

point (13.1)

- Do any of you want to jump out of a plane in a remote area to fix a high tension power line? Yeah, me either. - In order to get someone to do that job, a business must compensate them for it with higher wages, benefits like health insurance, and probably life insurance.

elasticity (12.1)

- Elasticity is still applicable. If you recall, when we discussed pure competition, we discovered that individual firms had perfectly elastic demand curves. - The same applies for perfect competition for labor. Remember, greater than 1, elastic. Less than 1, inelastic. Equal to 1, unitary. - The formula is the same as before: the percentage change in quantity demanded is in the numerator, and the percentage change in wage rate (the price businesses pay for your labor) is in the denominator. - So what determines the elasticity? There are several factors. - The first is resource substitutability. If there are many, many, many choices to substitute with, it is elastic. - For example, if there are many substitutes for wheat flour, what is the elasticity of demand for the labor to produce wheat flour? - If you said elastic, you are correct. Since the demand for labor is a derived demand, the elasticity of the demand for the product will also influence the elasticity of the demand of labor. - And finally, the ratio of the labor cost to total cost is also a factor. - The larger the proportion of total production costs accounted for by labor, the greater the elasticity of demand will be for labor.

how to calculate the value of the marginal product of labor (12.1)

- For a firm operating in a perfectly competitive output market, the value of the marginal product is the marginal product of labor multiplied by the firm's output price.

key ideas (13.1)

- Levels of educations impact the income labor can earn. - Determinates of demand and supply can impact the wage rate.

minimum wage (13.1)

- Part of the wage discussion must include minimum wage. - It can be controversial politically, but let us look at it economically. - This idea of a fair wage was first passed in 1938. It was designed to ensure workers earn at least an amount sufficient to support themselves and their families at a basic subsistence level. - The current federal rate is $7.25 per hour. Some localities and states have passed either a $10 or $15 rate now. But notice it is higher than the federal rate. It cannot be less. This movement stems from the Great Recession of 2007-2008 when unemployment reached into the levels of middle management, where you had people with master's who could not find jobs, and so pushed down into retail and fast food jobs.

derived demand (12.1)

- The demand for inputs like labor. - The most important purchase for firms is labor, and the derived demand for labor is based upon productivity of labor and the market price of the good/service produced. - What does that mean? - If labor is productive, what does that do to the cost of production? - It reduces the cost, and therefore, we (the business) will produce more. - Because we will produce more, the demand for labor will increase. - And if you recall, the law of supply says if the price of a product increases, businesses will supply more, and therefore, demand more labor.

point (12.2)

- The monopsonist will maximize profits by employing a smaller number of workers and paying a lower wage than the competitive market. - Society will obtain a smaller output and workers receive a wage rate that is less than their marginal revenue product. - While monopsonistic labor markets are uncommon in the United States, there are a few examples. - In the medical area, nurses are typically limited in their choice of employers to the relatively small number of hospitals that may be in their area. - Likewise, professional athletes are limited through player drafts to specific employers only. - In some situations, labor market workers unionize and create their own monopsonistic power.

wage differentials (13.1)

- Wage differentials are the differences between the wages of different groups of workers. - Wage differentials can occur either on the demand or supply side of labor markets: A weak labor demand will result in a low equilibrium wage, but a strong labor demand will result in a high equilibrium wage. - A low labor supply will result in a high equilibrium wage, while a higher labor supply results in a low equilibrium wage.

shifts (12.1)

- What causes a shift in the labor demand curve? First is changes in product demand: the higher the product demand, the higher the labor demand. - For example, in our coffee shop, the high demand for coffee increased the number of workers in the coffee shop. - Next is changes in productivity: the higher productivity of labor, the higher labor demand. - Higher productivity decreases the cost of producing a good or service, and therefore, producers will supply more, causing an increase in demand for labor. - Productivity itself depends on the quantity of other resources, technological advance, and quality of labor (skilled vs. unskilled). - The third factor is changes in the prices of other resources: a decline in price of complementary resources increases labor demand, while a change in price of substitute resources has an ambiguous effect on labor demand. - If a machine replaces labor and the price increases, the demand for labor more often than not, decreases. - If a machine works with labor and the price of the machine decreases, the demand for labor increases.

weeks 12+13 wrap-up

- When talking about a perfectly competitive labor force, workers have many choices of places to work. - If the supply of workers increases, companies will have more choices to choose amongst them, and this will shift the demand curve downward. - The law of supply still applies in this module (remember economics is a building block subject). - If the price of the good or service they produce decreases, this eats into their profits, and so the company will choose to produce less. - Since they are producing less, their demand for labor will also decrease, shifting the MRP curve to the left. - Under a monopsony, the company is the sole employer, so they hold the employment keys, so to speak. - This means they can pay less than a competitive firm, and hire fewer workers than a competitive firm.

figure 1 (12.2)

- refer to figure 1 - As you can see in the table in Figure 1, one worker can be hired at a wage rate of $1. - But hiring a second worker forces them to pay a higher wage rate of $2. - The marginal cost of the second worker is $3—the $2 paid to the second worker plus a $1 raise for the first worker. - From another viewpoint, total labor cost is now $4 (= 2 × $2), up from $1 (= 1 × $1). - So the MC of the second worker is $3 (= $4 − $1), not just the $2 wage rate paid to that worker. - Similarly, the marginal labor cost of the third worker is $5—the $3 that must be paid to attract this worker from alternative employment plus $1 raises, from $2 to $3, for the first two workers. - There are a couple of things to notice from the table. - First, the marginal cost increases faster than the wage rate. - In fact, for any number of workers more than one, the marginal cost of labor is greater than the wage. - This is because to hire one more worker requires paying a higher wage rate, not just for the new worker, but for all the previous hires also.

figure 1 (12.1)

- refer to figure 1 - In an early module, we discussed the circular flow. We were the households seeking to sell our resources of land, labor, and entrepreneurial ability in the Labor Services flow in return for wages, salaries, and benefits. We would take that income and provide that as payment to Firms for the purchase of their goods and services. Firms would purchase more Labor Services to make the goods and services to sell back to Households.

figure 2 (12.2)

- refer to figure 2 - Figure 2: Since monopsonies are the sole demander for labor, they face the market supply curve for labor. In order to increase employment, they must raise the wage they pay not just for new workers, but for all the existing workers they could have hired at the previous lower wage. As a result, the marginal cost of additional hiring labor is greater than the wage, and thus for any level of employment (above the first worker), MCL is above the Market Supply of Labor.

figure 2 (12.1)

- refer to figure 2 - For example, if I set up a coffee shop in the back of the classroom and when I open, I have one worker. - That one worker would be responsible for ringing up orders and producing those orders. - The Total Product (TP) would be acceptable, but I would prefer more profit. - As I add workers, my Total Product would increase. - In the demand for labor, this is known as Marginal Revenue Product: the addition of one more worker will increase Total Revenue, up to a point. - What will happen when I add 9, 10, 11, and 12 workers? My Total Product would decrease. - It isn't due to inferior workers. They run out of room; have to wait to use the register; espresso machine; or the blender. - This is the law of diminishing marginal returns kicking in, and this is why the demand curve for labor is downward-sloping. - The demand curve is equal to the Marginal Revenue Product (Figure 2), just like in pure competition when the demand curve was equal to Marginal Revenue. - Because of fixed capital, the marginal product of labor declines as the employer hires additional workers.

figure 3 (12.2)

- refer to figure 3 - Figure 3: A monopsony will hire workers up to the point Lm where its demand for labor equals the marginal cost of additional labor, paying the wage Wm given by the supply curve of labor necessary to obtain Lm workers. - If the firm wants to maximize profits, it will hire labor up to the point Lm where DL = VMP (or MRP) = MCL., as the graph in Figure 3 above shows. - Then, the supply curve for labor shows the wage the firm will have to pay to attract Lm workers. - Graphically, we can draw a vertical line up from Lm to the Supply Curve for labor and then read the wage Wm off the vertical axis to the left.

figure 3

- refer to figure 3 - On what does the value of each worker's marginal product depend? - If we assume that the employer sells its output in a perfectly competitive market, the value of each worker's output will be the market price of the product. - Thus, Demand for Labor = MPL x P = Value of the Marginal Product of Labor. - For firms operating in a competitive output market, the value of additional output sold is the price the firms receive for the output. - Since MPL declines with additional labor employed, while that marginal product is worth the market price, the value of the marginal product declines as employment increases.

figure 3 (13.1)

- refer to figure 3 - The chart in Figure 3 you have seen over and over again, you know what it is. The more education, the higher the income. - Investment in education yields a return in the form of earnings differences enjoyed over one's work life. - This is not to soft-pedal the impact of student loan debt. This data set is still applicable over the long-run.

figure 4 (12.2)

- refer to figure 4 - Figure 4: A monopsony hires fewer workers Lm than would be hired in a competitive labor market Lc. In exploiting its market power, the monopsony can also pay a lower wage Wm than workers would earn in a competitive labor market Wc.

figure 4 (12.1)

- refer to figure 4 - We also have to look at the other side, as we still need balance and that's Marginal Resource Cost. - What does it add to my Total Cost when I hire an additional worker? - In a competitive labor market, Marginal Resource Cost of labor = market wage rate. - And just like perfect competition, the rule for employing labor is our sweet spot where Marginal Revenue Product = Marginal Resource Cost. - In a competitive labor market, market supply and demand will establish the wage rate. - Individual firms are wage takers and that means that for each additional unit of labor hired, each firm's total labor cost increases by exactly the amount of the constant market wage rate. - Thus, the resource price, which is the market wage rate, and the resource cost (marginal resource cost) are equal. - The MRP = MRC rule tells us that a competitive firm will hire units of labor up to the point at which the market wage rate is equal to its MRP (Figure 4).

figure 5 (12.1)

- refer to figure 5 - As you can see, the rise in employment is centered on the rapidly aging population and their need for medical services. - The other side of course, is based on the rapid technological changes our society has seen. - It is also not surprising to see where technology and machinery have taken over, that there is a decline in the demand for labor. - The above table in Figure 5 is representative of the changes in technology and the change in the age of the population.

figure 5 (12.2)

- refer to figure 5 - Let us take a look at unions and their models. - This table in Figure 5 is a brief snapshot of unionization around the industrialized world (2018 data). - Many complain about the U.S. being overrun by unions, but you can see that the U.S. actually has a small percentage in comparison, and that number is shrinking as more states pass right to work laws. - Virginia is a right to work state, in case you were wondering.

figure 6 (12.1)

- refer to figure 6 - Looking at the table in Figure 6 above, one would wonder why are postal service workers on here? - But then again, most of us are not mailing letters anymore, so they're out. - Also listed is photographic processing. Many of you do not know the struggle of trying to load film in full sunshine into a camera without exposing it, taking pictures, then waiting two weeks to discover none of your vacation pictures came out. - These days, you can snap a picture on your phone, filter it, Instagram it, etc.

figure 6 (12.2)

- refer to figure 6 - The first type of union we see is the craft union model. - Craft unions, like electricians and plumbers, require members to have a license, which restricts membership. - Craft unions will also lobby for immigration restrictions and child labor laws. - The child labor law lobbying is based more on restricting the supply of members, than on anything else. - Further measures to restrict membership numbers include mandatory early retirement and a shorter work week. - All of these are designed to limit the supply of labor to boost wages. - As you can see on the graph in Figure 6 below, as the supply diminishes, the wage rate increases.

figure 7 (12.1)

- refer to figure 7 - Figure 7: Here we can see that the marginal cost of labor, MRC, is constant at $10 and is equal to the wage rate. Each additional unit of labor employed adds precisely its own wage rate to the firm's total resource cost. - As you can see, in a perfectly competitive labor market, wage is determined by the intersection of market supply and market demand. - Each individual firm decides, given its individual labor demand curve, how many workers to hire at a going market wage, using the MRP= MRC rule (our sweet spot). The firm maximizes its profits by hiring workers up to the point at which MRP = MRC.

figure 7 (12.2)

- refer to figure 7 - The industrial union model includes unskilled, semi-skilled, and skilled workers to cover more workers and expand their bargaining power for wages. - By agreeing to the union's wage demand, the firm becomes a wage taker. - The labor supply becomes perfectly elastic, creating a higher wage rate but, again, reducing the number of workers employed (Figure 7).

If the firm operates in a perfectly competitive labor market where the going market wage is $12, what is the firm's profit maximizing level of employment? (12.1)

In a perfectly competitive labor market where the going market wage is $12, a profit-maximizing firm will hire workers up to the point where the market wage equals the marginal revenue product. In this case, the market wage equals the marginal revenue product when the labor is 5 because at that level, the marginal revenue product is $12.

What is the marginal cost of labor for a firm that operates in a competitive labor market? How does this compare with the MCL for a monopsony? (13.1)

The marginal cost of labor for a firm that operates in a competitive labor market is equal to the wage rate. The marginal cost of labor for a monopsony, a labor market where there is only one employer (i.e. the monopsony is the sole demander for labor), would be greater than the wage. In order for a monopsony to increase employment they must raise the wage they pay not just for new workers, but for all the existing workers they could have hired at the previous lower wage.

Do unions typically oppose new technology out of a fear that it will reduce the number of union jobs? Why or why not? (12.2)

Unions have sometimes opposed new technology out of a fear of losing jobs, but in other cases unions have helped to facilitate the introduction of new technology because unionized workers felt that the union was looking after their interests and that their jobs would be protected.

What would the equilibrium wage and quantity be in this market if no union existed? (refer to table) (12.2)

With no union, the equilibrium wage rate would be $18 per hour and there would be 8,000 bus drivers.