LABOR UNIONS. Appendix. Key Concepts

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1 Appendix LABOR UNION Key Concepts Market Power in the Labor Market A labor union is an organized group of workers that aims to increase wages and influence other job conditions. Craft union a group of workers with similar skills working for different companies. Industrial union a group of employees with different skills working in the same industry or firm. Unions negotiate with employers using collective bargaining. Unions objectives for their members include increasing compensation, improving working conditions, and expanding job opportunities. Methods of achieving these objectives include: restricting the supply of labor. increasing the demand for union labor and/or making it more inelastic. Unions work to increase the demand for their members labor by raising the marginal product of their members, encouraging import restrictions, supporting minimum wage laws, supporting immigration restrictions, and increasing the demand for the product produced by their members. In competitive labor markets, unions have the following effects: In unionized labor markets, the increased demand and decreased supply raise union members wages and incomes. If the supply decreases more than the demand increases, the quantity of employment falls. After allowing for differences in skills, the unionnonunion wage differential is between 10 and 25 percent. Monopsony A monopsony is a market in which there is a single buyer. A firm that is the only employer in town is a monopsonist in the labor market. A monopsony determines what wage it will pay and pays the lowest wage that lets it hire the number of workers it wants to employ. FIGURE A14.1 A Monopsony Labor Market MCL MRP To hire more labor, a monopsony must pay a higher wage to all its workers. Because it raises the wage it pays all workers, for a monopoly the marginal cost of labor exceeds the wage paid the new worker. As illustrated in Figure A14.1, the marginal cost of labor curve (MCL) for the monopsony slopes upward and lies above the supply curve () of labor. The profit-maximizing rule for a monopsony is to (1) hire the quantity of labor indicated by the intersection 263

2 264 CHAPTER 14 of the MCL curve and the MRP curve, and (2) then use the labor supply curve to offer the lowest wage rate possible that allows it to hire the quantity of labor it wants. In Figure A14.1, the monopsony hires 300 hours of labor and pays $6 per hour. With a monopsony, employment and the wage rate are lower than in a competitive labor market. In Figure A14.1 a competitive labor market would result in employment of 400 hours of labor and a wage rate of $9 per hour. If the monopsonist faces a union, the labor market is characterized as a bilateral monopoly. In this case the wage rate is determined by the relative bargaining strengths of the firm and the union. A minimum wage law can affect the outcome in a monopsony market. The minimum wage makes labor supply perfectly elastic at the minimum wage so that the MCL falls to equal the minimum wage. In response, the monopsonist hires more labor and pays a higher wage rate. Helpful Hints 1. IMILARITIE BETWEEN MONOPONY AND MONOPOLY : There is a close parallel between (a) the relationship between the labor supply curve and the MCL curve for a monopsony, and (b) the relationship between the demand curve and the marginal revenue curve, MR, for a monopoly discussed in Chapter 12. Both relationships stem from market power: a monopsony sets the wage it pays and a monopoly sets the price it charges. The monopoly, as the only seller in an output market, faces a downward-sloping demand curve. The marginal revenue from the sale of an additional unit of output is less than the price because the monopolist must lower the price on all the units it sells, not only the one new unit but also all previous units sold as well. o the MR curve lies below the demand curve for the single-price monopoly. The monopsony in a labor market faces an upward sloping labor supply curve. The marginal cost of hiring an additional unit of labor is higher than the wage because the monopsony must raise the wage for all the workers it hires, not only the one new worker but also all previous workers hired. o the MCL curve lies above the labor supply curve for the monopsony. Questions True/False and Explain Market Power in the Labor Market 11. Unions try to improve their members working conditions. 12. A closed shop refers to a firm that is not operating because its workers are on strike. 13. Unions support minimum wage laws in part because they raise the cost of low-skilled labor, a substitute for high-skilled union labor. 14. Most union members earn about 50 percent more than nonunion workers in comparable jobs. Monopsony 15. For a monopsony, the marginal cost of hiring another worker is less than the wage it must pay. 16. A monopsony determines the amount of labor it hires by where the MCL curve crosses the labor supply curve. 17. A monopsony pays a higher wage rate than would be paid in a perfectly competitive labor market. Multiple Choice Market Power in the Labor Market 11. An arrangement in which workers can be employed without joining a union is a (an) a. non-union shop. b. union shop. c. closed shop. d. open shop. 12. Unions attempt to do all of the following EXCEPT a. increase the demand for their members labor. b. decrease the supply of labor in their market. c. lower the price of labor. d. raise the wage paid their members. 13. Which of the following would unions be most likely to support? a. Decreasing the legal minimum wage. b. Encouraging immigration. c. Restricting imports. d. Decreasing demand for the goods that their workers produce.

3 APPENDIX: LABOR UNION With competitive labor markets, in a unionized labor market, unions the wage rate and employment. a. lower; decrease b. lower; increase c. raise; decrease d. raise; increase Monopsony 15. In order to hire an additional worker, a monopsony must pay a. a higher wage rate than it paid before. b. the same wage rate it paid before. c. a lower wage rate than it paid before. d. a wage rate that is sometimes higher, sometimes lower, and sometimes the same as before, depending on its labor supply curve. 16. For a monopsony, the MCL curve a. lies above the labor supply curve. b. is the same as the labor supply curve. c. lies below the labor supply curve. d. is the same as the labor demand curve. Use Figure A14.2 for the next four questions. FIGURE A14.2 Multiple Choice Questions 7, 8, 9, 10 W c W b W a MCL L a L b L c MRP 17. If Figure A14.2 illustrates a monopsony, the level of employment is a. L a. b. L b. c. L c. d. none of the above. 18. If Figure A14.2 illustrates a monopsony, the wage rate is a. W a. b. W b. c. W c. d. none of the above. 19. If Figure A14.2 illustrates a perfectly competitive labor market, the level of employment is a. L a. b. L b. c. L c. d. none of the above. 10. If Figure A14.2 illustrates a perfectly competitive labor market, the wage rate is a. W a. b. W b. c. W c. d. none of the above. 11. A bilateral monopoly occurs when a a. group of unorganized firms bargain with a group of unorganized workers. b. single monopsony firm bargains with a group of unorganized workers. c. group of unorganized firms bargains with a union representing the workers. d. monopsony bargains with a union representing the workers. 12. If a strike or lockout occurs in a bilateral monopoly situation, it usually is because the a. demand for labor is relatively inelastic. b. supply of labor is relatively inelastic. c. firm is not maximizing its profit. d. union or firm has misjudged the bargaining situation. 13. A minimum wage can lead a monopsony to a. lower its wage rate and lower its level of employment. b. increase employment. c. lower its wage rate and increase its level of employment. d. none of the above.

4 266 CHAPTER 14 hort Answer Problems FIGURE A14.3 hort Answer Problems 1 and Figure A14.3 shows a competitive labor market. The initial equilibrium wage rate is $9 an hour, and the level of employment is 400 hours. uppose that a union organizes and raises the wage rate to $12 an hour. In the figure, illustrate what happens to the level of employment. Is there any unemployment? What happens in the long run? 2. uppose that the union in problem 1 manages to make the demand for its members more inelastic. The wage rate stays at $12 an hour. What effect does making the demand more inelastic have on the amount of employment? The amount of unemployment? 3. Table A14.1 shows the demand and supply of labor for one industry in the economy. (For simplicity, the supply is assumed to be perfectly inelastic.) a. What is the equilibrium quantity of labor employed? The equilibrium wage rate? b. A union organizes in this industry and negotiates a raise in the wage rate to $8 an hour. Now what is the level of employment? Is there any unemployment? 4. Continuing with the situation in Problem 3, suppose that after the union negotiates the higher wage rate, all the workers who cannot find employment leave the first industry and switch to a second. a. The initial labor demand and supply schedules for the second industry are shown in Table D TABLE A14.1 Unionized Industry Wage rate (dollars per hour) TABLE A14.2 Quantity demanded Quantity supplied $ Nonunionized Industry Wage rate (dollars per hour) Quantity demanded (thousands of Initial quantity supplied New quantity supplied $ A14.2. Complete the table showing the new quantity of labor supplied. b. Based on Table A14.2, before the first industry became unionized, what was the equilibrium wage rate in the second industry? After the first industry was unionized, what is the equilibrium wage rate in the second industry? c. After the first industry is unionized, what is the wage differential between the two industries? 5. Most members of labor unions earn wages well above the minimum wage. Why, then, do unions support raising the legal minimum wage? 6. Table A14.3 (on the next page) shows the supply of nurses facing North Towne Hospital, the only employer of nurses in a small town. a. Calculate the values for the MCL column and complete the table.

5 APPENDIX: LABOR UNION 267 TABLE A14.3 North Towne Hospital Wage rate (dollars per day) Labor demand ( Labor supply ( $ FIGURE A14.4 hort Answer Problem 6 (b) Marginal cost of labor, MCL (dollars per hour) b. Plot the labor demand, labor supply, and MCL schedules in Figure A14.4. c. How many nurses does North Towne hire? What wage rate does North Towne pay? d. uppose there were many hospitals so that the market for nurses was perfectly competitive rather than a monopsony. In this case, how many nurses would be hired and what wage rate would they be paid? e. How does the wage rate that North Towne pays when it is a monopsony compare with the wage rate paid if the market was perfectly competitive? How does the number of nurses hired compare in the two cases? You re the Teacher 1. Unions ought to be banned. After all, they re just monopolies operating in a labor market! And my bet is that they somehow cause inefficiency! React to the student s statement and then explain how unions do, indeed, result in inefficiency. Wage rate (dollars per day) Nurses (number per day)

6 268 CHAPTER 14 True/False Answers Answers FIGURE A14.5 Multiple Choice Question 6 Market Power in the Labor Market 11. T Improving their members working conditions is one of the union s goals. 12. F A closed shop is a factory or business in which a worker must be a union member in order to work at a particular job. 13. T By raising the cost of substitute inputs, such as low-skilled workers, unions increase the demand for their members labor. 14. F Union members earn about 10 to 25 percent more than nonunion workers with comparable jobs. MCL Monopsony 15. F The marginal cost of hiring another worker exceeds the wage rate that must be paid. 16. F The level of employment is determined where the MCL curve crosses the MRP curve. 17. F A monopsony exploits its market power by paying a lower wage rate. Multiple Choice Answers Market Power in the Labor Market 11. d The question defines an open shop. 12. c Unions strive to raise the price of labor, the wage rate. 13. c Imports are produced by foreign labor, which is a substitute for domestic, union labor. Hence unions try to restrict imports. 14. c By raising the wage rate that must be paid their members, unions decrease employment in the unionized industry. Monopsony 15. a The monopsony must pay the higher wage to all the workers it employs, so the marginal cost of hiring another worker exceeds the wage rate. 16. a As Figure A14.5 shows, the MCL curve is above the labor supply curve. 17. b A monopsony determines the level of employment by setting the marginal cost of labor (the MCL) equal to the marginal revenue product of labor (the MRP) so it hires L b labor. 18. a The monopsony hires L b labor. The supply curve indicates that the lowest wage rate it can pay and still hire this amount of labor isw a. 19. c In a perfectly competitive labor market, the equilibrium quantity of labor is determined by the intersection of the supply curve and demand curve, which is the same as the MRP curve. 10. b The last four answers show that a monopsony pays a lower wage rate and hires fewer workers then in a perfectly competitive labor market. 11. d Bilateral monopoly occurs when both the demand side and supply side of a market are monopolies. 12. d By misjudging the situation, either the union or firm might make an offer that it does not realize will drive the other to close the company through a lockout or strike. 13. b In a competitive labor market, a minimum wage decreases employment, but it might increase employment in a monopsony labor market.

7 APPENDIX: LABOR UNION 269 Answers to hort Answer Problems FIGURE A14.6 hort Answer Problem 1 FIGURE A14.7 hort Answer Problem D D 0 D Figure A14.6 shows the union s effect on this labor market. After the rise in the wage to $12 an hour firms in the industry hire only 200 hours of labor per week. Employment falls from 400 hours to 200 hours. Unemployment results. The amount of unemployment will depend on how many workers believe that they will find work at the wage rate of $12 an hour. The supply curve of labor shows that at this wage rate, 500 hours of labor are supplied. Therefore there can be unemployment up to 300 hours of labor a week (500 hours 200 hours), the length of the gray arrow. 2. If the union is able to make demand for its labor more inelastic, the demand curve changes as illustrated in Figure A14.7. Demand D 1 is more inelastic than the initial demand, D 0, because the percentage reduction in the quantity of labor demanded as a result of the higher wage rate is less along D 1 than along D 0. When demand is more inelastic, the decrease in employment from the higher wage is smaller, with employment falling only to 300 hours rather than all the way to 200 hours per week. (The accompanying increase in unemployment from the higher wage also is smaller.) This answer shows why unions strive to make the demand for their members labor less elastic: It partly offsets the adverse employment effect from the higher union wage rate a. The equilibrium quantity of labor employed is 140,000 workers and the equilibrium wage rate is $6 an hour. b. Once the union negotiates a wage of $8, firms decrease the quantity of employment they demand to 130,000. Hence employment now equals 130,000. Unemployment equals the number of workers willing to work at $8 an hour (140,000) minus the number actually employed (130,000), so unemployment is 10,000. TABLE A14.4 Nonunionized Industry Wage rate (dollars per hour) Quantity demanded (thousands of Initial quantity supplied New quantity supplied $ a. Table A14.4 shows the new situation in the nonunionized industry. The 10,000 unemployed workers who could no longer find work in the unionized industry have switched to the nonun-

8 270 CHAPTER 14 ionized industry, thereby increasing the supply of labor in this industry. b. Before the first industry was unionized, the equilibrium wage rate in the second industry was $6 an hour because this wage rate equated the quantity of labor demanded to the (old) quantity of labor supplied. After the first industry became unionized, the wage rate in the second industry falls to $4 an hour because this wage rate equates the quantity demanded of labor to the (new) quantity supplied. c. The union-nonunion wage differential is $4. This differential equals the $2 rise in the wage rate in the unionized industry and the $2 drop in the wage rate in the nonunionized industry. 5. A rise in the minimum wage boosts the cost of hiring low-skilled labor. Low-skilled labor can substitute to an extent for high-skilled union labor. Hence the rise in the cost of low-skilled labor increases the demand for high-skilled labor and makes sustaining its higher wage easier for the union. TABLE A14.5 hort Answer Problem 6 (a) Wage rate (dollars per day) Labor demand ( Labor supply ( $ Marginal cost of labor, MCL (dollars per hour) $ a. Table A14.5 shows the marginal cost of labor, the MCL. To calculate these values, consider the MCL between 2 and 3 workers. The marginal cost of labor is ( total wages) L. Total wages equals the number of workers employed times the wage rate, so for 2 nurses it is $20 times 2 workers, or $40 and for 3 nurses it is $90. o the MCL between 2 and 3 workers is equal to FIGURE A14.8 hort Answer Problem 6 (b) Wage rate (dollars per day) MCL D Nurses (number per day) ($90 $40) ( 3 2) = $50. The rest of the MCLs in the table are calculated similarly. b. Figure A14.8 contains plots of the labor demand, labor supply, and MCL schedules. c. As Figure A14.8 illustrates, North Towne hires 4 nurses because employing this number of nurses sets the marginal cost of labor equal to the marginal revenue product of labor, given by the demand curve. This number of workers is the amount determined by the intersection of North Towne s MCL curve and its labor demand curve. The labor supply curve shows that 4 nurses will work for $40 a day, so North Towne pays a wage rate of $40 a day. d. If the labor market was perfectly competitive, the intersection of the demand curve for labor and the supply curve of labor shows the quantity of labor employed. Figure A14.8 indicates that 6 nurses would be the equilibrium level of employment and that the equilibrium wage rate would be $60 a day. e. North Towne hires fewer workers and pays them a lower wage when it is a monopsony. You re the Teacher 1. Well, it s your view that unions ought to be banned. This is your normative judgment, and I might agree or disagree with it. But I will agree with your positive not normative guess that unions

9 APPENDIX: LABOR UNION 271 create inefficiency. The way to see this result is fairly straightforward. Perfectly competitive firms produce the efficient level of output. To do so, they have to hire the efficient level of employment. But unions restrict the level of employment in order to boost their members wage rates. Hence firms can t hire the right number of workers, and thus they can t produce the right level of output. Therefore unions, like monopolies, create inefficiency and deadweight losses.

10 272 CHAPTER 14 Chapter Quiz 11. The type of union an autoworker belongs to is a. an open shop union. b. a craft union. c. an industrial union. d. a closed union. 12. Why do unions try to increase the demand for their members labor? a. Because if the demand for their members labor increases, the wage rate paid their members as well as the level of employment both increase. b. Because unions are unable to decrease the supply of labor, so in order to raise their members wage rates, they must increase the demand for labor. c. The premise of the question is incorrect because unions do not try to increase the demand for their members labor. d. None of the above answers is correct. 13. A union that only manages to restrict the supply of labor in its market its member s wage rates and their employment. a. raises; increases b. raises; decreases c. lowers; increases d. lowers; decreases 14. A shop that hires only union members is a. an open shop. b. a closed shop. c. a union shop. d. None of the above. 15. Unions support a. repealing minimum wage laws. b. encouraging immigration. c. import restrictions. d. All of the above. 16. A market with a single buyer is a. a monopoly. b. a union market. c. a monopsony. d. illegal. 17. An economy has two sectors, industry and services. Labor markets in both are initially competitive. If a union forms in the industrial labor market, wage rates in the industrial sector and wages rates in the service sector. a. rise; rise b. rise; fall c. fall; rise d. fall; fall 18. Compared to a perfectly competitive market, a monopsony firm pays a wage rate and hires labor. a. higher; more b. high; less c. lower; more d. lower; less 19. If a minimum wage above the existing wage rate is imposed in a monopsony labor market, then a. it is possible for both the wage rate and level of employment to increase. b. employment definitely decreases, but the effect on the wage rate is ambiguous. c. employment definitely decreases and the wage rate definitely increases. d. None of the above answers is correct. 10. The Taft-Hartley Act in 1947 made illegal a. all labor unions. b. craft unions. c. professional associations. d. closed shops. The answers for this Chapter Quiz are on page 368