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EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized &

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Presentation on theme: "EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized &"— Presentation transcript:

1 EA Session 21: August 24, 2007

2 Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized & non-unionized labor (optional) Bilateral Monopoly (monopolist seller of labor facing a monopsonist buyer) The Decline of Private Sector Unionism in USA

3 Factor Markets with Monopsony Power Assume – The output market is perfectly competitive. – Input market is pure monopsony. Monopsonist forcing wage determination on sellers supply curve, i.e., forcing labor to get only its minimum supply price. Examples of Monopsony Power – Government Soldiers Missiles B2 Bombers – NASA Astronauts – Company town

4 S L = Average Expenditure (AE) Marginal Expenditure (ME) Why is marginal expenditure greater than S L ? D = VMP L Marginal and Average Expenditure under monopsony (typology 3: Competitive seller) Units of Input Price (per unit of input) w M = 13 LMLM wcwc LcLc C WMWM W M < W C L M < L C Extent of monopsonistic exploitation

5 S L = Average Expenditure (AE) Marginal Expenditure (ME) Why is marginal expenditure greater than S L ? D = VMP L Marginal and Average Expenditure under monopsony (typology 4: monopolist seller) Units of Input Price (per unit of input) W M = 13 L* wcwc LcLc C D=MP L.MR L MM LMLM W MM W MM < W M L MM < L M M=monopsonist MM=monopolist cum monopsonist Extent of exploitation

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 objectives –Maximizing wage rate (W M, L M ), M=monopoly situation; –Maximizing wage bill (W 2, L 2 ); –Maximizing employment (W C, L C ) ; C=competitive situation

7 Economic Rent w1w1 L1L1 The quantity of labor L 1 that maximizes the rent that employees earn is determined by the intersection of the marginal revenue and supply or labor curves; union members receive a wage rate of w 1. SLSL DLDL MR Monopoly Power of Sellers of Labor (typology 5) Number of Workers Wage per worker A L2L2 w2w2 Finally, if the union wishes to maximize total wages paid to workers, it should allow L 2 union members to be employed at a wage rate of w 2 because the marginal revenue to the union will then be zero. L*L* w*w* WM=WM= WC=WC= W M > W C L M < L C LM=LM= LC=LC= B C Note exploitation of labor=0 at A, B, C

8 Economic Rent w1w1 L1L1 M=only monopolist seller of labor, indicated by points A, B, C SLSL DLDL MR Monopoly Power of Sellers of Labor coupled with Producer Monopoly Power (typology 6) Number of Workers Wage per worker A L2L2 w2w2 MM=monopolist seller of labor facing monopolist producer, Indicated by points A, B, C L*L* w*w* D L for monopolist MR WC=WC= WM=WM= L MM =L M W MM < W M L MM < L M W MM B C A B C

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 VMP L ) or a monopolist (demand for labor being MRP L )

10 A Two-Sector Model of Labor Employment – Union monopoly power impacts the non- unionized part of the economy. Factor Markets with Monopoly Power

11 Wage Determination/discrimination in Unionized and Non-unionized Sectors (optional) MC U MC NU D DUDU MR U WCWC WUWU LCLC LULU D is total demand for labor, assuming that both union and non-union labor are physically identical D U is demand for union labor, which - due to the union activities - takes precedence over demand for non-union labor L C is total labor employed (sum of union i.e. L U and non-union labor i.e. L C - L U ) DD is the portion of total labor demand that has to be satisfied by non-union labor D Additional wage bill due to union To see how union monopoly power impacts the non- unionized part of the economy

12 Bilateral Monopoly: Market in which a Monopolist seller (MP) of labor sells to a Monopsonist buyer (MS) of labor (typology 7) Number of Workers Wage per worker D L = VMP L MR S L = AE ME Wage Possibilities wCwC W MP = W MS =

13 Implications of Bilateral Monopoly for Wages Monopolist seller of labor will try to set wage rate at W MP. Monopsonist buyer of labor will try to set wage rate at W MS. 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) Number of Workers Wage per worker D L = VMP L D L =MRP L S L = AE ME Wage Possibilities wCwC W MP = W MS = MR L W MP W MS W MP < W MP L MP < L MP W MS < W MS L MS < L MS L MP L MS L MP L MS

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 W c.

16 The Decline of Private Sector Unionism in USA Observations – Union membership and monopoly power has been declining. – Initially, during the 1970s, union wages relative to non-union wages fell. – In the 1980s union wages stabilized relative to non- union wages. – In the 1990s membership has been falling and wage differential has remained stable. Explanations – The 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.


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