1. 5.3. Monopoly in the product market So far firms were “price-takers” and D c curve was horizontal (at the firm level!) But under monopoly in the product market D c will now have (-) slope What was this supposed to mean? If Y c goes up P c has to go down The MRPL drops because of two reasons: 1.Law of diminishing returns (as in perfect competition in product market) 2.Businessmen will have to cut prices down in order to produce/sell more  monopoly entails a social loss (higher P and smaller Y)

2. 5.3. Monopoly in the product market Given that the monopolist faces a negatively sloped D C, his D L will be less elastic  MRPL < VMPL This inequality implies a loss of social efficiency, even with perfect competition in the labor market! We have: 1.D L of monopolist is less elastic 2.Still, he behaves as the perfect competitor  MRPL = MWC 3.Pays same wage as perfect competitor (no unions) 4.Badly utilized resources (loss of efficiency)

3. 5.4. Monopsony in the labor market The opposite of PC in the LM Now  one buyer of L Before (PC)  workers had lots of choices, as a result firms had to pay W e (eq.); now there is one buyer/firm Other monopsony conditions might arise due to: business loyalty, family obligations, fear to the unknown Just as the monopolist can increase p, the monopsonist can lower W ‒ both in relation to PC (in PM and LM)

4. The difference between monopsony and PC is the S L curve for the firm: before it was infinitely elastic; now it has (+) slope The S L of the monopsonist is equal to the market’s, for there is only one firm hiring To attract more L the monopsonist must increase W (“wage- setter”)  the firm will do that as it expands What is the hiring rule?  whenever MRPL > MWC But MWC should be defined  steeper than the S L In hiring more L the firm will have to rise W to everyone 5.4. Monopsony in the labor market

5. A controversial and political issue 1938 in USA, covered 43% of occupations, today 90% approx. Fixed amount per hour ($)  continually eroding Goal: to what extent is it fulfilled? To keep a minimum for health and welfare for workers  “floor” for the “working-poor” BUT… the truth is that a small share of people lives in utter poverty; instead, it might affect “secondary earners” badly (e.g. youngsters, part-timers, first timers) 5.5. Minimum wage law

6. In PC, who wins and who loses? Example (regulated and non-regulated sectors) Consequences: 1.W min will lower the L in regulated sector (scale ef.  labor costs go up)  in the long run L will fall even more (substitution ef.) 2.Unemployment in the regulated sector follows, albeit not necessarily: out of LF (study, L h ) or work in the non-regulated sector 3.Workers move to non-regulated sector, leading to a fall of W and an increase of L there 4.“Winners” are those who keep L earning more in reg. sector (W min ) 5.“Losers” are: laid-off workers from regulated sector, consumers, firms making less π, and those workers earning less in the non-regulated sector 5.5. Minimum wage law

7. Therefore, has the minimum wage law accomplished its goal? It will depend on the elasticity of the D L If ED L < 1 (inelastic) then the drop (%) in L will be smaller than the increase (%) of W If ED L > 1 (elastic) then the drop (%) in L will be bigger than the increase (%) of W However, there will always be workers that might lose their jobs  non-regulated sector, W go down (if flexible, if not  unemployment) Other cases: monopsony, efficiency wages 5.5. Minimum wage law

8. 5.6. Union strength The idea behind unions is that workers sell their labor services collectively They can raise W in 3 ways: 1.Increasing D L 2.Limiting S L 3.Bargaining W > W e For 1: i) increase D c, ii) increase py, iii) Δp i, iv) increase m For 2: i’) limiting n, ii’) ΔY NL For 3: credible threats (restrict S L, strikes)

9. A simple model can show some things about unionized LM: 1.Long and “chronic” waiting list 2.“Safe” contracts 3.Lower ED L : only in short run  impossible in long run With foreign competition and from other sectors, the sector might suffer (p rises) The D L tends to shift to the right with t, so the result of this “interference” is a lowering of the rate of growth of job opportunities 5.6. Union strength

10. 5.7. Adjustment dynamics So far, the changes in D L were accompanied by immediate changes in S L  equilibrium achieved instantly But in reality it might take longer  dynamics “Spider web model” Example: D L up  W up  attracts L  W falls  L falls  the cycle repeats itself Also: 1) another shock of D L “in the way” (a new spider web), 2) the elasticities can bring about a non-stable solution, a situation oscillating between excesses y shortages

11. 5.8. Types of unemployment Employment rate (%) = 100*employment/EAP Unemployment rate (%) = 100*unemployment/LF Natural level of employment consistent with certain output and with a natural rate of unemployment (NRU-NAIRU) Types of unemployment: 1.Frictional: the LM never clears completely  frictions due to i) search unemployment or ii) wait unemployment 2.Structural: part of the NRU. It is like the frictional type but long- lived; there is a severe mismatch between D L and S L 3.Deficient-Demand (Keynesian): recessions and depressions that cause a “deficiency” in aggregate demand  lay-offs 4.Classical: when W > W e  intervention (W min, unions, etc.) Only 1 is voluntary, 2-4 involuntary