1. Chapter 12 Labor Markets and Labor Unions © 2009 South-Western/ Cengage Learning

2. Labor Supply Individual labor supply – Willing and able – Many possible uses over the realistic range of wages – Depends on Abilities Tastes Opportunity cost 2

3. Labor Supply and Utility Maximization Utility – Work Purchase goods and services from earnings – Leisure Normal good Diminishing marginal utility Three uses of time – Market work – Nonmarket work – Leisure 3

4. Labor Supply and Utility Maximization Market and nonmarket work – Disutility – Increasing marginal disutility – Net utility of work Disutility of work Utility of goods/services purchased Maximize utility – Allocate time: expected MU of last unit spent in each activity is identical 4

5. Wages and Individual Labor Supply Substitution effect of wage increase – Increased opportunity cost of Leisure; nonmarket work – Substitute market work for other activities – Increase Q supplied to market work Income effect of wage increase – Higher income Increased demand for normal goods: leisure – Reduce Q supplied to market work 5

6. S Exhibit 1 Individual labor supply curve for unskilled work 6 2004030486055 Hours of labor per week $14 13 11 12 9 10 7 8 Wage rate per hour Wages below $12 per hour Substitution effect outweighs the income effect : quantity of labor a worker supplies increases with the wage Wages above $12 per hour Income effect dominates: Supply curve bends backward. Further increases in the wage reduce the quantity of labor supplied

7. Wages and Individual Labor Supply Individual labor supply – Backward bending – Income effect of higher wage eventually dominates substitution effect Flexibility of hours worked – Part-time; overtime – Timing and length of vacation – School – Retire 7

8. Nonwage Determinants of Labor Supply – Other sources of income – Nonmonetary factors – Difficulty of the job – Quality of work environment – Status of the position – Value of job experience – Taste for work Market supply of work – Horizontal sum of all the individual supply curves 8

9. Exhibit 2 Deriving the market labor supply curve from individual labor supply curves 9 Wage rate Labor0 SASA (a) Individual A Labor0 SBSB (b) Individual B Labor0 SCSC (c) Individual C Labor0 S (d) Market supply

10. Why Wages Differ Differences in – Training, Education, Age – Experience – Ability – Risk Geographic differences Discrimination Union membership—typically higher wages 10

11. Exhibit 4 Age, education, and pay 11 Age Group Average Yearly Earnings (thousands) No high school diploma High school diploma Bachelor’s degree Professional degree

12. Unions and Collective Bargaining Labor union – Group of workers – Join to improve terms of employment—wages and benefits Craft union – Particular skill, craft Industrial unions – Unskilled, semiskilled, and skilled workers in an industry 12

13. Collective Bargaining, Mediation, Arbitration Collective bargaining Negotiation; Mutually agreeable contract Mediation If negotiations reach an impasse Public interest Arbitration - Neutral third part Evaluates different positions of parties Issues a legally binding ruling Strike Major source of union power 13

14. Union Wages and Employment Union desires Higher wages More benefits Greater job security Better working conditions Unions can increase wages – Inclusive (industrial) union – Exclusive (craft) union – Increase demand for union labor 14

15. Inclusive, or Industrial Unions Union: – Negotiate industry-wide wages for each class of labor Higher wage (wage floor) Lower employment Non-union sector – Increased supply to non-union—spillover effect – Lower wage – Increased possibility of becoming unionized, therefore often match union pay/benefits 15

16. S s Exhibit 5 Effects of labor union’s wage floor 16 No union: market wage is W. Each firm can hire as much labor as it wants. The firm hires more labor until MRP=W: e units of labor; industry employment is E. (a) Industry Wage rate W’ W (b) Firm D Wage rate W’ W d=Marginal revenue product Labor per period e0 e’ Labor per period E0 E’’ E’ s’ a Union negotiates wage W’, above the market wage W; the supply curve facing the firm shifts up from s to s’. Each firm hires less labor, e’; industry employment falls to E’; excess quantity of labor supplied = E’’-E’ (increased unemployment).

17. Exhibit 6 Median weekly earning are higher for union than nonunion workers 17

18. Exclusive, or Craft Unions Reduce the labor supply – Restrict union membership Higher initiation fees Longer apprenticeship periods Tougher qualification exams More restrictive licensing requirements – Force all employers in the industry to hire only union members Higher wage Lower employment 18

19. Increasing Demand of Union Labor Increase demand for union-made goods – Derived demand Restrict supply of nonunion-made goods – Derived demand Increase productivity of union labor Featherbedding – Forcing employers to hire more union workers than they want or need 19

20. D’’ S’ Exhibit 7 Effect of Unions reducing labor S/increasing labor D 20 S S If a union can successfully restrict labor supply in an industry, the supply curve shifts from S to S’. Wage: rises from W to W’ Employment: drops from E to E’. (a) Reducing labor supply Wage rate W’ W (b) Increasing labor demand D Wage rate W’’ W D Labor per period E’’0 E Labor per period E0E’ If a union can increase the demand for union labor, the demand curve shifts from D to D’’. Wage: raises from W to W’’ Employment: raises from E to E’’.

21. Recent Trends in Union Membership 1955 – 35% of US workers in unions 2006 – 12% of US workers in unions – More right-to-work states – Structural changes in U.S. economy – Growth in market competition – Declined number of strikes 21

22. Exhibit 8 Unionization rates by age and gender 22 Age group Percentage of workers unionized