EA Session 21: August 24, 2007 1

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 2

Factor Markets with Monopsony Power Assume The 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 Power Government Soldiers Missiles B2 Bombers NASA Astronauts Company town

Why is marginal expenditure Marginal and Average Expenditure under monopsony (typology 3: Competitive seller) SL = Average Expenditure (AE) Marginal Expenditure (ME) Why is marginal expenditure greater than SL? Price (per unit of input) 20 D = VMPL wc Lc C wM = 13 LM 15 WM 10 Extent of monopsonistic exploitation 5 WM< WC LM< LC 1 2 3 4 5 6 Units of Input

Why is marginal expenditure Marginal and Average Expenditure under monopsony (typology 4: monopolist seller) SL = Average Expenditure (AE) Marginal Expenditure (ME) Why is marginal expenditure greater than SL? Price (per unit of input) 20 D = VMPL wc Lc C WM = 13 L* 15 WMM 10 Extent of exploitation M=monopsonist MM=monopolist cum monopsonist WMM< WM LMM< LM 5 D=MPL.MR LMM LM 1 2 3 4 5 6 Units of Input

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 (WM, LM), M=monopoly situation; Maximizing wage bill (W2, L2); Maximizing employment (WC, LC); C=competitive situation

Monopoly Power of Sellers of Labor (typology 5) Economic Rent w1 L1 The quantity of labor L1 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 w1. Wage per worker L2 w2 Finally, if the union wishes to maximize total wages paid to workers, it should allow L2 union members to be employed at a wage rate of w2 because the marginal revenue to the union will then be zero. C WM= B SL A WC= w* WM> WC LM< LC Note exploitation of labor=0 at A, B, C DL MR LM= LC= L* Number of Workers

Monopoly Power of Sellers of Labor coupled with Producer Monopoly Power (typology 6) Economic Rent w1 L1 M=only monopolist seller of labor, indicated by points A, B, C Wage per worker L2 w2 MM=monopolist seller of labor facing monopolist producer, Indicated by points A’, B’, C’ C WM= C’ WMM B B’ SL A WC= w* A’ WMM< WM LMM< LM DL D’L for monopolist LMM =LM L* Number of Workers MR’ MR

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)

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

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 identical DU is demand for union labor, which - due to the union activities - takes precedence over demand for non-union labor LC 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 labor Additional wage bill due to union D’ To see how union monopoly power impacts the non- unionized part of the economy WU MCU WC MCNU D LU LC DU MRU

Bilateral Monopoly: Market in which a Monopolist seller (MP) of labor sells to a Monopsonist buyer (MS) of labor (typology 7) Wage per worker SL = AE ME 25 DL = VMPL MR 20 WMP= 25 19 Wage Possibilities wC 15 WMS= 10 5 Number of Workers 10 20 40

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.

Bilateral Monopoly: Market in which a Monopolist Factor Supplier sells to a Monopsonist cum Monopolist (typology 8) Wage per worker W’MP< WMP L’MP< LMP SL = AE ME 25 DL = VMPL DL’=MRPL 20 WMP= 25 19 W’MS< WMS L’MS< LMS Wage Possibilities W’MP wC 15 WMS= 10 W’MS LMS 5 LMP Number of Workers 10 20 40 L’MP L’MS MR’L

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.

The Decline of Private Sector Unionism in USA Observations Union 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. 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.