2 Overview Factor Markets with Monopsony Power Factor Markets with Monopoly PowerWage discrimination across unionized & non-unionized labor (optional)Bilateral Monopoly (monopolist seller of labor facing a monopsonist buyer)The Decline of Private Sector Unionism in USA2
3 Factor Markets with Monopsony Power AssumeThe output market is perfectly competitive.Input market is pure monopsony.Monopsonist forcing wage determination on seller’s supply curve,i.e., forcing labor to get only its minimum supply price.Examples of Monopsony PowerGovernmentSoldiersMissilesB2 BombersNASAAstronautsCompany town
4 Why is marginal expenditure Marginal and Average Expenditure under monopsony (typology 3: Competitive seller)SL = AverageExpenditure (AE)MarginalExpenditure (ME)Why is marginal expendituregreater than SL?Price(per unitof input)20D = VMPLwcLcCwM = 13LM15WM10Extent of monopsonisticexploitation5WM< WCLM< LC123456Units of Input
5 Why is marginal expenditure Marginal and Average Expenditure under monopsony (typology 4: monopolist seller)SL = AverageExpenditure (AE)MarginalExpenditure (ME)Why is marginal expendituregreater than SL?Price(per unitof input)20D = VMPLwcLcCWM = 13L*15WMM10Extent ofexploitationM=monopsonistMM=monopolistcum monopsonistWMM< WMLMM< LM5D=MPL.MRLMMLM123456Units of Input
6 Factor Markets with Monopoly Power & Alternative Objectives of Unions Just as buyers of inputs can have monopsony power, sellers of inputs can have monopoly power.The most important example of monopoly power in factor markets involves labor unions.Unions have one of the following three objectivesMaximizing wage rate (WM, LM), M=monopoly situation;Maximizing wage bill (W2, L2);Maximizing employment (WC, LC); C=competitive situation
7 Monopoly Power of Sellers of Labor (typology 5) EconomicRentw1L1The quantity of labor L1 that maximizesthe rent that employees earn is determinedby the intersection of the marginal revenueand supply or labor curves; union membersreceive a wage rate of w1.WageperworkerL2w2Finally, if the union wishes to maximize totalwages paid to workers, it should allow L2union members to be employed at a wagerate of w2 because the marginal revenueto the union will then be zero.CWM=BSLAWC=w*WM> WCLM< LCNote exploitation oflabor=0 at A, B, CDLMRLM=LC=L*Number of Workers
8 Monopoly Power of Sellers of Labor coupled with Producer Monopoly Power (typology 6) EconomicRentw1L1M=only monopolist seller of labor,indicated by points A, B, CWageperworkerL2w2MM=monopolist seller of laborfacing monopolist producer,Indicated by points A’, B’, C’CWM=C’WMMBB’SLAWC=w*A’WMM< WMLMM< LMDLD’L for monopolistLMM=LML*Number of WorkersMR’MR
9 Implications of monopoly sale of labor Seller of labor forcing wage determination along the demand curve of labor (i.e., trying to realize the full demand price of labor), depending upon whether the seller of product is a competitor (demand for labor being VMPL) or a monopolist (demand for labor being MRPL)
10 Factor Markets with Monopoly Power A Two-Sector Model of Labor EmploymentUnion monopoly power impacts the non-unionized part of the economy.
11 Additional wage bill due to union Wage Determination/discrimination in Unionized and Non-unionized Sectors (optional)D is total demand for labor, assuming that both union and non-union labor are physically identicalDU is demand for union labor, which - due to the union activities - takes precedence over demand for non-union laborLC is total labor employed (sum of union i.e. LU and non-union labor i.e. LC - LU)D’D is the portion of total labor demand that has to be satisfied by non-union laborAdditional wage bill due to unionD’To see how union monopolypower impacts the non-unionized part of theeconomyWUMCUWCMCNUDLULCDUMRU
12 Bilateral Monopoly: Market in which a Monopolist seller (MP) of labor sells to a Monopsonist buyer (MS) of labor (typology 7)WageperworkerSL = AEME25DL = VMPLMR20WMP=2519WagePossibilitieswC15WMS=105Numberof Workers102040
13 Implications of Bilateral Monopoly for Wages Monopolist seller of labor will try to set wage rate at WMP.Monopsonist buyer of labor will try to set wage rate at WMS.Depending upon the relative bargaining power of the buyer and seller of labor, the wage rate will lie between these two extremes.
14 Bilateral Monopoly: Market in which a Monopolist Factor Supplier sells to a Monopsonist cum Monopolist (typology 8)WageperworkerW’MP< WMPL’MP< LMPSL = AEME25DL = VMPLDL’=MRPL20WMP=2519W’MS< WMSL’MS< LMSWagePossibilitiesW’MPwC15WMS=10W’MSLMS5LMPNumberof Workers102040L’MPL’MSMR’L
15 Who will win under Bilateral Monopoly? The union will win if its threat to strike is credible.The firm will win if its threat to hire non-union workers is credible.If both make credible threats, the wage will be at Wc.
16 The Decline of Private Sector Unionism in USA ObservationsUnion membership and monopoly power has been declining.Initially, during the 1970’s, union wages relative to non-union wages fell.In the 1980’s union wages stabilized relative to non-union wages.In the 1990’s membership has been falling and wage differential has remained stable.ExplanationsThe unions have been attempting to maximize the individual wage rate instead of total wages paid.The demand for unionized employees has probably become increasingly elastic as firms find it easier to substitute capital for skilled labor.