Transcript Chapter 9 - The Citadel

Chapter 9
Labor Economics
Introduction
Technovate and 24/7 sound like U.S. based
firms, but in fact, they are located in India.
The companies offer low-cost labor services to
U.S. firms in need of customer service.
Many U.S. politicians assert these and other
Indian call centers are “stealing” U.S. jobs.
This chapter will help you evaluate this claim.
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29-2
Did You Know That...
• The principles we have used to explain
the market in which goods are sold will
also describe the labor market?
• Profit-maximizing firms will hire labor up
to the point where the marginal benefit
equals the marginal cost?
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29-3
Labor Demand for a Perfectly
Competitive Firm
• We will start our analysis under the
assumption that the market for input factors
is perfectly competitive.
• We will further assume that the output market
is perfectly competitive.
• This provides a benchmark against which to
compare other labor markets or product
markets that are not perfectly competitive.
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29-4
Labor Demand for a Perfectly
Competitive Firm (cont'd)
• Assumptions
 Each employer is one of a very large
number of employers.
 Workers do not need special skills.
 Workers are free to move from one
employer to another.
 The firm is a price taker in the
labor market.
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29-5
Labor Demand for a Perfectly
Competitive Firm (cont'd)
• Marginal Physical Product (MPP) of Labor
 The change in output resulting from the addition
of one more worker
 The change in total output accounted for by
hiring the worker, holding all other factors of
production constant
 Eventually declines because of the law of
diminishing marginal product
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29-6
Labor Demand for a Perfectly
Competitive Firm (cont'd)
• Marginal Revenue Product (MRP)
 The marginal physical product (MPP)
times the marginal revenue (MR)
 The additional revenue obtained from a
one-unit change in labor input
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29-7
Labor Demand for a Perfectly
Competitive Firm (cont'd)
• The marginal revenue product
represents the incremental
worker’s contribution to the
firm’s total revenues.
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Figure 29-1 Marginal Revenue
Product, Panel (a)
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29-9
Figure 29-1 Marginal Revenue
Product, Panel (b)
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29-10
Labor Demand for a Perfectly
Competitive Firm (cont'd)
• Marginal Factor Cost (MFC)
 The cost of using an additional unit of
an input
 For example, if a firm can hire all the
workers it wants at the going wage rate,
the MFC of labor is the wage rate.
Marginal factor cost =
Change in total cost
Change in amount of resources used
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29-11
Labor Demand for a Perfectly
Competitive Firm (cont'd)
• In a perfectly competitive labor market
 The market determines the wage
 The individual employer is a wage taker
 All workers are hired for the same wage
 MFC = wage
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29-12
Labor Demand for a Perfectly
Competitive Firm (cont'd)
• The MRP curve demand for labor
 The MRP curve is the demand curve for
labor for the firm.
 This tells us how many workers will be
hired at various possible wage rates.
 The firm will hire any worker who can
contribute to revenues by more than they
contribute to costs.
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29-13
Labor Demand for a Perfectly
Competitive Firm (cont'd)
• General rule for hiring
 The firm hires workers up to the point at
which the additional cost associated with
hiring the last worker is equal to the
additional revenue generated by hiring
that worker.
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29-14
Labor Demand for a Perfectly
Competitive Firm (cont'd)
• Derived Demand
 The factors of production are needed to
manufacture a final good or to provide a
final service.
 Thus, the demand for labor is influenced
by demand for the final product.
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29-15
Figure 29-2 Demand for Labor,
a Derived Demand
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29-16
The Market Demand for Labor
• The downward-sloping portion of each
firm’s MRP curve is also its demand
curve for labor.
• When we go to the entire market for
labor, we will also find that the quantity
of labor demanded varies inversely with
wage rate changes.
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29-17
Figure 29-3 Derivation of the
Market Demand Curve for Labor
• Wage rate of $20
• Firms will hire
2,000 workers
• Wage rate of $10
• Firms will hire
3,000 workers
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29-18
The Market Demand
for Labor (cont'd)
• Price elasticity of demand for labor
similar to elasticity for goods
• Percentage change in quantity
demanded divided by percentage
change in price of labor
 Inelastic < I
 Unit-elastic = 1
 Elastic > 1
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29-19
Determinants of Demand Elasticity
for Inputs
• The price elasticity of demand for a variable
input will be greater
1. The greater the price elasticity of demand for the
final product
2. The easier it is to employ substitute inputs
3. The larger the proportion of total costs accounted
for by the particular variable input
4. The longer the time period available
for adjustment
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29-20
Wage Determination in a Perfectly
Competitive Labor Market
• Having developed the demand curve for
labor in a particular industry, let’s turn to the
labor supply curve.
• By adding supply to our analysis, we can
determine the equilibrium wage rate that
workers earn in an industry.
• We can think in terms of a supply
curve for labor that slopes upward in
a particular industry.
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29-21
Figure 29-4 The Equilibrium Wage Rate
and the Electronic Organizer Industry
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29-22
International Example: A Global Shortage
Hits the Market for Mining Workers
• Manufacturing industries in nations
such as India and China have grown
rapidly during the 2000s.
• Demand for mined commodities
(aluminum, copper, zinc, nickel) used
as manufacturing inputs has soared.
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29-23
International Example:
A Global Shortage Hits the Market
for Mining Workers (cont'd)
• Commodity prices have increased, which
has raised the MRP of a key production
input—mine workers.
• The quantity of qualified mining labor
demanded has been pushed above the
quantity of qualified labor supplied.
• Managers of mining companies commonly
try to hire away other firms’ workers
promising higher wages.
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29-24
Shifts in Market Demand for and the
Supply of Labor
• Reasons for labor demand curve shifts
1. Change in demand for the final product
2. Change in labor productivity
3. Change in the price of related inputs
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29-25
Reasons for Labor
Demand Curve Shifts
• A change in the demand for the final
product that labor is producing will shift
the market demand curve for labor in
the same direction.
• A change in labor productivity will shift
the market labor demand curve in the
same direction.
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29-26
Reasons for Labor
Demand Curve Shifts (cont'd)
• A change in the price of a substitute
input will cause demand for labor to
change in the same direction.
• A change in the price of a
complimentary input will cause the
demand for labor to change in the
opposite direction.
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29-27
Reasons for Labor
Supply Curve Shifts
• Labor supply curves may shift in
a particular industry for a number
of reasons.
1. Change in wages in other industries
2. Changes in working conditions
3. Job flexibility
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29-28
Labor Outsourcing, Wages,
and Employment
• Outsourcing
 A firm’s employment of labor outside the
country in which the firm is located
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29-29
Labor Outsourcing, Wages,
and Employment (cont'd)
• Outsourcing
 Some U.S.-based companies outsource
labor to other countries.
 Some firms based around the globe
outsource labor to the United States.
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29-30
Figure 29-5 Outsourcing of U.S.
Computer Technical-Support Services
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29-31
Labor Outsourcing, Wages,
and Employment (cont'd)
• Question
 How are U.S. workers affected?
• Answers
 If cheaper labor is available in other countries, this
will dampen the demand for U.S. labor.
 But as the volume of global commerce rises, there
may be more of a demand by foreign firms to hire
U.S. workers as well.
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29-32
Labor Outsourcing, Wages,
and Employment (cont'd)
• Labor outsourcing by U.S. firms tends
to reduce U.S. wages and employment.
• Whenever foreign firms engage
in labor outsourcing to the United
States, however, U.S. wages and
employment increase.
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29-33
Figure 29-6 Outsourcing of Accounting
Services by Canadian Firms
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29-34
Labor Outsourcing, Wages,
and Employment (cont'd)
• Short-run effects
 Even in the best of times, workers
experience short-run ups and downs in
wages and jobs.
 In the United States, after all, about 4
million jobs come and go every month.
 To be sure, in the near term, workers
earn lower pay and experience
reduced employment.
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29-35
Labor Outsourcing, Wages,
and Employment (cont'd)
• Long-term benefits
 Labor allows for more specialization, which
enhances trade.
 If
goods are produced and services are
performed in those countries where the
opportunity costs are lowest, then global
economic growth is enhanced.
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29-36
Labor Outsourcing, Wages,
and Employment (cont'd)
• Expanded production and consumption
possibilities made possible by
outsourcing and other forms of
international trade generate higher total
revenues across U.S. firms.
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29-37
Labor Outsourcing, Wages,
and Employment (cont'd)
• Benefits for U.S. workers
 Firms can outsource their labor needs and
will operate more efficiently.
 This means that the products they sell
have lower prices.
 In turn, each dollar in a worker’s paycheck
has a greater purchasing power.
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29-38
Labor Outsourcing, Wages,
and Employment (cont'd)
• In the long run, outsourcing helps boost the
overall value of MRP in industries throughout
the U.S. economy.
• Consequently, the ultimate long-run effect of
outsourcing is an increase in demand for labor
in most industries.
• Increased labor demand pushes up wages
and boosts employment, and economists
estimate outsourcing has created more jobs
than it has destroyed.
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29-39
Labor Outsourcing, Wages,
and Employment (cont'd)
• International labor outsourcing is also
known as “labor offshoring.”
• One U.S. firm has found a way to
literally engage in “offshore”
outsourcing activities.
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29-40
E-Commerce Example:
Outsourcing Computer Programming
Very Close to the Border
• A company called SeaCode has hundreds of
workers from nations such as India and
Russia on a cruise ship off the U.S. coast.
• Most of the workers are computer
programmers that SeaCode hires to write
software for U.S. businesses.
• In this way, people from abroad who cannot
obtain immigration visas can earn roughly
$1,800 per month.
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29-41
Monopoly in the
Product Market (cont'd)
• Question
 Why does the monopolist hire fewer workers?
• Answer
 The marginal benefit to the monopolist of hiring
an additional worker is affected by the fact that
the monopolist faces a reduction in the price
charged on all units in order to be able to sell
more of her product.
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29-42
The Utilization of
Other Factors of Production
• Profit maximization revisited
 MRP of labor = Price of labor (wage)
 MRP of land = Price of land (rent)
 MRP of capital = Price of capital (cost per
unit of service)
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29-43
The Utilization of
Other Factors of Production (cont'd)
• Cost minimization
 To minimize total costs for a particular rate
of production, the firm will hire factors of
production up to the point at which the
marginal physical product per last dollar
spent on each factor is equalized.
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29-44
The Utilization of
Other Factors of Production (cont'd)
• Cost minimization
MPP of labor
Price of labor
=
MPP of capital
Price of capital
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=
MPP of land
Price of land
29-45
Issues and Applications:
Now Indian Outsourcing Specialists
are Also Outsourcing
• An outsourcing specialist chooses
to outsource.
• Indian outsourcing firms increasingly
look abroad for talent.
• For India, outsourcing has become a
two-way street.
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29-46
Introduction
What are labor unions?
What are the objectives of unions, and
what strategies do they utilize to pursue
their goals?
Why have the aims of some unions
recently clashed with others?
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30-47
Did You Know That...
• Half of U.S. labor union members are in
only six states?
• Once a union represents all the workers
who supply a particular type of labor, an
element of monopoly power replaces
the competitive outcome?
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30-48
Industrialization and Labor Unions
• Labor Unions
 Worker organizations that seek to secure
economic improvements for their members
 They also seek to improve safety, health,
and other benefits (such as job security)
of their members.
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30-49
Industrialization
and Labor Unions (cont'd)
• Craft Unions
 Labor unions composed of workers who engage
in a particular trade or skill
• Collective Bargaining
 Negotiation between the management of a
company or of a group of companies and the
management of a union or group of unions for the
purpose of reaching a mutually agreeable contract
that sets wages, fringe benefits, and working
conditions for all employees in all unions
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30-50
Industrialization
and Labor Unions (cont'd)
• Unions in the U.S.
 Knights of Labor
 American Federation of Labor
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30-51
Industrialization
and Labor Unions (cont'd)
• Early labor issues
 8-hour workday
 Equal pay for men and women
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30-52
Industrialization
and Labor Unions (cont'd)
• The formation of industrial unions
 National Industrial Act of 1933
 National Labor Relations Act 1935,
otherwise known as the Wagner Act
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30-53
Industrialization
and Labor Unions (cont'd)
• The Congress of Industrial
Organizations (CIO) was formed
in 1938.
 It was composed mainly of
industrial unions.
 Prior to the formation of the CIO, most
labor organizations were craft unions.
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30-54
Industrialization
and Labor Unions (cont'd)
• Industrial Unions
 Labor unions that consist of workers from
a particular industry, such as automobile
manufacturing or steel manufacturing
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30-55
Industrialization
and Labor Unions (cont'd)
• Congressional control over labor unions
 The Wagner Act (1935)
 Gave
unions the right to organize workers and
to engage in collective bargaining
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30-56
Industrialization
and Labor Unions (cont'd)
• Congressional control over labor unions
 Taft-Hartley Act of 1947
 Allowed

right-to-work laws
Laws that make it illegal to require union
membership as a condition of continuing
employment in a particular firm
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30-57
Industrialization
and Labor Unions (cont'd)
• Congressional control over labor unions
 Taft-Hartley Act of 1947
 Made

A
closed shops illegal
A business enterprise in which employees must
belong to the union before they can be hired and
must remain in the union after they are hired
union shop however, is legal

Non-union members join later
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30-58
Industrialization
and Labor Unions (cont'd)
• Congressional control over labor unions
 Taft-Hartley Act of 1947
 Prohibited

jurisdictional disputes
Disputes involving two or more unions over which
should have control of a particular jurisdiction
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30-59
Industrialization
and Labor Unions (cont'd)
• Congressional control over labor unions
 Taft-Hartley Act of 1947
 Prohibited

sympathy strikes
A strike by a union in sympathy with another union’s
strike or cause
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30-60
Industrialization
and Labor Unions (cont'd)
• Congressional control over labor unions
 Taft-Hartley Act of 1947
 Prohibited

secondary boycotts
A boycott of companies or products sold by
companies that are dealing with a company
being struck
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30-61
Industrialization
and Labor Unions (cont'd)
• Congressional control over labor unions
 Taft-Hartley Act of 1947
 Established
the 80-day cooling-off period
A
court injunction can be used to delay a strike
if it would imperil the nation’s safety or health.
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30-62
Industrialization
and Labor Unions (cont'd)
• The current status of labor unions:
we consider
 Worldwide trends in unionization
 U.S. unionization trends
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30-63
Figure 30-1 Union Membership
as a Share of Total Employment
in Selected Nations
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30-64
Figure 30-2
Decline in Union Membership
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30-65
Industrialization
and Labor Unions (cont'd)
• Explaining the fall in union membership
 Deregulation
 Immigration
 Shift from manufacturing to services
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30-66
Table 30-1 The Ten Largest Unions
in the United States
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30-67
Union Goals and Strategies
• Strikes: the ultimate bargaining tool
 Purpose is to impose costs and reduce
profits of the employer
 Workers do not receive wages during
the time of the strike, but they may
receive some compensation from the
union strike fund.
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30-68
Union Goals and Strategies (cont'd)
• Strikebreakers can reduce the
bargaining power of the strike
 Temporary
or permanent workers hired by
a company to replace union members who
are striking
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30-69
Union Goals and Strategies (cont'd)
• One of the major roles of a union that
establishes a wage rate above the
market clearing wage rate is to ration
available jobs among the excess
number of workers who wish to work in
unionized industries.
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30-70
Figure 30-3
Unions Must Ration Jobs
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30-71
Union Goals and Strategies (cont'd)
• Unions must ration the available
jobs by
 Seniority
 Apprenticeship
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30-72
Union Goals and Strategies (cont'd)
• Union wage and employment strategies
 Employ all union members
 Maximize member income
 Maximize wages for certain workers
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30-73
Figure 30-4
What Do Unions Maximize?
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30-74
Example: To Save Members Jobs, the
UAW Agrees to a Two-Tier Pay Scale
• Many of DaimlerChrysler’s Jeep
vehicles are assembled in two plants
located in Toledo, Ohio.
• In an effort to reduce hourly wage
costs, some pre-assembly work was
shifted out of these plants.
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30-75
Example: To Save Members Jobs,
the UAW Agrees to a Two-Tier Pay
Scale (cont'd)
• To preserve union jobs, the UAW
agreed to adopt a two-tier wage system
at the Toledo Jeep plants.
• Workers who specialize in final
assembly make $26 per hour; those in
pre-assembly make $15 per hour.
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30-76
Union Goals and Strategies (cont'd)
• Union strategies to raise
wages indirectly
 Limit entry over time
 Alter demand for union labor
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30-77
Union Goals and Strategies (cont'd)
• Limiting entry over time
 One way to raise wage rates without
specifically setting wages is for a union to
limit the size of its membership to the size
of its employed workforce when the union
was first organized.
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30-78
Figure 30-5
Restricting Supply over Time
If union membership limited to Q1,
wages increase to 21 instead of
20 and employment is reduced
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30-79
Union Goals and Strategies (cont'd)
• The demand for union labor can be
increased by
1. Increasing worker productivity
2. Increasing the demand for
union-made goods
3. Decreasing the demand for
non-union-made goods
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30-80
Economic Effects of Labor Unions
• Do union members earn higher wages?
• Are they more or less productive than
nonunionized workers?
• What are broader economic effects
of unionization?
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30-81
Figure 30-6 The Most Heavily Unionized
Occupations in the United States
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30-82
Economic Effects
of Labor Unions (cont'd)
• Unions are able to raise wages if they can
successfully limit the supply of labor in a
particular industry.
• Economists estimate that the average union
wage premium is $2.25 an hour.
• Yet annual earnings for union workers are
not necessarily higher, because they may
work somewhat fewer hours.
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30-83
Economic Effects
of Labor Unions (cont'd)
• Question
 How do unions affect labor productivity?
• Answers
 There is some evidence that
featherbedding creates inefficiency
in the unionized industries.
 But some economists argue that unions
actually enhance productivity by reducing
labor turnover.
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30-84
Economic Effects
of Labor Unions (cont'd)
• Featherbedding
 Any practice that forces employers to use
more labor than they would otherwise or to
use existing labor in an inefficient manner
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30-85
Economic Effects
of Labor Unions (cont'd)
• Economic benefits and costs of labor
unions—two opposing views
1. Unions are monopolies whose main
effect is to raise the wage rate of high
seniority members.
2. Unions increase labor productivity
by promoting generally better
work environments.
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30-86
Monopsony: A Buyer’s Monopoly
• Assumptions
 Firm is perfect competitor in the product
market: it cannot alter the price of the
product it sells, and it faces a perfectly
elastic demand curve for its product.
 One factory not only hires the workers but
also owns all the businesses in the town,
this buyer of labor is called a monopsonist,
the single buyer.
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30-87
Monopsony:
A Buyer’s Monopoly (cont'd)
• The monopsonist faces an upwardsloping supply curve of labor.
• Consequently, the marginal factor cost
of increasing the labor input by one unit
is greater than the wage rate.
• Thus the marginal factor cost curve
always lies above the supply curve.
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30-88
Monopsony:
A Buyer’s Monopoly (cont'd)
• Monopsonistic Exploitation
 Paying a price for the variable input that is
less than the marginal revenue product
 The difference between marginal revenue
product and the wage rate
• Bilateral Monopoly
 A market structure consisting of a
monopolist and a monopsonist
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30-89
Competition in Buying and Selling!
• SELLING
BUYING
• Pure Competition
Pure Competition
• Monopolistic Comp
Monopsonistic Comp
• Oligopoly
Oligopsony
• Monopoly
Monopsony
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30-90
Figure 30-11 Membership Shares for
Unions in the Change to Win Federation
versus Unions Remaining in the AFL-CIO
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30-91
Key Terms and Concepts
• boycott
• collective bargaining
• craft union
• derived demand
• income distribution
• income effect
• industrial union
• labor productivity
• labor unions
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• marginal factor cost
(MFC)
• marginal physical
product (MPP) of Labor
• marginal revenue
product (MRP)
• minimum wage
• strike
• substitution effect
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