Lecture 18: Labor Markets

Outline:

1. Labor markets and the distribution of income.

2. Why labor markets are more complex than other factor markets.

3. Competitive labor markets

4. Wage differentials in competitive labor markets

5. Non-competitive labor markets

i. Unions in a competitive L/M

ii. Monopsony L/M

iii. Unions in a monopsony L/M

6. Dollars and Sense: Articles 5, 24, 25

7. New Field Guide: 2.1, 2.2, 2.4, 2.5, 2.8, 2.15, 2.16

1. Labor markets and the distribution of income:

* 3/4 of the income earned in the US is accounted for by wages.

* labor markets have the largest effect on the distribution of income in the US

* inequality in labor markets has a significant effect on inequality in the distribution of income.

2. Why are labor markets more complex than other factor markets?

i. Exchanging the services of HUMAN BEINGS involves:

* moral and ethical considerations

* relationships between people which involve notions of fairness, justice, loyalty, appreciation.

* prejudice and discrimination can be present

* non-monetary factors are important in addition to monetary factors

ii. Labor market institutions include:

* unions

* employer organizations

* collective bargaining arrangements

* government regulations

All of these human factors and institutions play a role in the determination of wages and working conditions - making labor markets complex.

3. Competitive Labor Markets:

* The essence of a Competitive L/M is that neither employers nor employees have an power to affect wages.

Simple world: In a competitive L/M with identical workers there would be one wage paid to all workers which would reflect their productivity.

GRAPH of a single Labor Market

Ld= demand for labor

Ls= supply of labor

We= equilibrium wage

Le=equilibrium level of employment

Real world: Workers differ in the real world and even in a competitive L/M this will cause wage differentials.

GRAPH of different Labor Markets

4. Wage differentials in a Competitive L/M:

* Even in a world of competitive labor markets - where no individual worker and no individual firm has any power over wages - there will still be wage differentials among workers.

* There are three causes of wage differentials in competitive labor markets:

1. Differentials arising from LUCK:

* Genetic inheritance and early environment - both of which are outside of an individual's control - can influence a person's ability to earn an income.

Question: Can you think of an example to illustrate this?

2. Differentials arising from WORKING CONDITIONS:

* Identical workers with identical skills can be rewarded differently if they work under different working conditions.

Question: Can you think of an example to illustrate this?

3. Differentials arising from HUMAN CAPITAL:

* Wage differential can result from differences in human capital that reflect differences in the productivity of workers.

Definition:

Human capital refers to the stock of skills acquired by individual workers.

Individuals investment in human capital by undertaking:

1. formal education and/or

2. on-the-job training

Aside: A good book on this is former Labor Secretary Robert Reich's book The Work of Nations

* Investments in human capital increase a workers stock of skills and thus their productivity which determines their wage.

5. Non-competitive Labor Markets:

Factors that make a L/M non-competitive:

* Unions - power on the side of the employees

* Monopsony - power on the side of the employers

* Discrimination - making wage and employment decisions on the basis of factors other than a worker's productivity.

i. Unions in a competitive L/M:

Definition:

A Union is an association of workers that is authorized to represent them in wage and employment negotiations with employers.

Unions generally attempt to secure higher wages in one of two ways:

1. Bargain for a minimum wage:

GRAPH

Result: A higher wage but lower level of employment and the creation of unemployment

2. Restrict supply into the occupation through apprenticeships, training requirements, and government licensing:

GRAPH

Result: A higher wage and a lower level of employment.

* READ p. 323 of your textbook on Unions in the US

Note: Unions are the only organizations that attempt to restrict supply into an occupation in order to keep earnings high. Other organizations include: The American Medical Association (AMA), the American Bar Association (ABA).

ii. Monopsony L/M:

Definition:

A Monopsony is a single employer or an group of employers that "acts like" a single employer in a labor market.

Note: Monopsony is the factor market analog to monopoly

GRAPH:

* Upward sloping supply curve with only one employer - introduces the idea of a MCL (marginal cost of labor).

* MCL lies above the supply curve because - to attract an extra worker the employer must pay that worker a higher wage than the going wage, but must also pay that higher wage to all the workers already employed.

Result: Wages are lower AND employment is lower in a monopsony labor market than in a competitive labor market.

Question: WHY?

iii. Unions in a monopsony L/M:

Suppose a union enters a monopsony labor market and bargains for a higher wage for its workers.

Question: What happens to the wage and the level of employment in the labor market?

GRAPH

Result: A union in a monopsony L/M can increase the wage AND the level of employment.

Note: The union can increase the wage AND the level of employment if it sets the wage between Wm and Wmc. If the union bargains for a wage above Wmc then it will have the same effect as in a competitive labor market - higher wage at the expense of employment.

Note: Remember back to the minimum wage? If a minimum wage is imposed in a monopsony L/M it can not only increase the wage it can also increase the level of employment!!

Question: How can you explain the difference in the effect of a union in a competitive L/M compared with a monopsony L/M?