Chapter 14 / 29 Imperfect Competition In Labor Markets

Chapter Objectives
After you have read and studied this chapter you should be able to discuss the effects of a firm's monopoly power and/or monopsony power on wages and hiring; major features of U.S. labor legislation; evolution of the labor union movement; the effects of wage discrimination on the efficiency of the labor market; and the overall effects of unions on economic performance.

Chapter Review: Key Points

1. The marginal revenue product curve (MRP) for a firm selling in an imperfectly competitive product market will be below the value of the marginal product of labor (VMP) curve. All firms will hire labor until the marginal revenue product equals the marginal factor cost (MFC) of labor. Because MRP < VMP, employees of firms with market power, are paid less than the values of their marginal products. This difference is called monopolistic exploitation. 2. A monopsonist is the sole buyer of a particular resource or good. Labor monopsonists face an entire market supply of labor and, if all workers are paid equally, their marginal factor cost curve will lie above the labor supply curve. Relative to pure competitors, labor monopsonists pay lower wages and hire fewer workers. In addition, labor will be paid less than the value of its marginal product, a difference referred to as monopsonistic exploitation. 3. When competitive conditions prevail in both resource and product markets, the firm hires labor until VMP = MRP = MFC = w. When monopoly prevails in the product market but the monopoly firm hires labor under competitive conditions, labor is hired up to the point where VMP > MRP = MFC = w. Given a competitive product market and monopsony power in the labor market, a firm will maximize profits by hiring labor until VMP = MRP = MFC > w. Finally, when a firm has both monopoly and monopsony power, labor is hired up to the point where VMP > MRP = MFC > w. Any difference between VMP and w represents exploitation, a term borrowed from Marxist jargon.

Byrns: Student Guide for Learning Contemporary Economics

423

4. A minimum wage legally set above the equilibrium wage in competitive labor markets will raise unemployment. It is possible, but unlikely, that minimum wages might increase employment and wages simultaneously, but only where there is substantial monopsonistic exploitation of unskilled workers and wage discrimination is not practiced, an unlikely combination. A union wage hike might have the same effect. However, the markets where minimum-wage hikes raise existing wages are typically rather competitive. Thus, increased unemployment is the normal result when minimum wages are increased. 5. Unions have traditionally organized into craft or industrial unions. Craft unions were the bulwark of the American Federation of Labor (AFL); industrial unions comprised the Congress of Industrial Organizations (CIO). Frequent jurisdictional disputes over which organization would represent particular workers caused the two to merge into the AFL-CIO in 1955. 6. Unions and their leaders use several kinds of agreements with organized firms to protect their prerogatives as sole bargaining agents for workers. Closed shops require workers to be union members as a precondition for employment. At the other end of the spectrum, open shops permit union and nonunion members to work side by side. This arrangement is quite unsatisfactory to unions since nonmembers receive the benefits of collective bargaining but need not pay union dues. Union shops are compromises between closed and open shops. The employer can hire union or nonunion workers, but an employee must join the union within some specified

period (usually 30 days) to retain the job. The Taft-Hartley Act of 1947 outlawed the closed shop and permitted individual states to pass right-to-work laws forbidding union shops. In many of these states, agency shops have been created to protect unions from free riders. Workers may choose not to belong to the union but must pay dues. 7. Unionism developed in a hostile environment. The Great Depression shifted public policy in favor of collective bargaining. As trade unionism grew, many felt that unions became corrupt and too powerful, and tighter organizing and financial reporting constraints were imposed on labor organizations. The union movement was relatively stable from roughly 1950 until 1980, but has declined as a percentage of the total labor force in the 1980s. The labor force increasingly consists of white-collar workers who are reluctant to join unions. 8. Bilateral monopoly, a very early model of collective bargaining, describes the limits to the wage bargaining process but provides little predictive power. Sir John Hicks's bargaining model predicts both final wage settlements and the duration of strikes. 9. Labor unions have typically employed three methods to increase the wages of their members: (a) reductions of the supply of workers to an industry; (b) establishing higher wages and then parceling the available work to members; and (c) policies designed to increase demands for union labor.

424

Chapter 14 / 29: Imperfect Competition In Labor Markets

10. Wage differentials between union and nonunion workers average roughly 10-15 percent. Some people blame inflation on excessive union wage demands. Large wage hikes in key industries may set the pattern for other industries. Higher wages may raise unemployment and induce public officials to pursue expansionary macroeconomic policies, further intensifying inflationary pressures. Since organized labor represents less than onesixth of the work force, it is unlikely that unionism explains much inflation.

11. A small percentage of collective bargaining negotiations end in strikes, and most are short. Strikes often impose costs on individuals and firms that are not direct parties to labor negotiations. Strikes may cause shortages, shipping delays, or losses of perishable products. 12. Public employee unions frequently mix politics and collective bargaining to win their demands. Public officials negotiating contracts are seldom those who are responsible for developing government budgets; thus, they may have only weak incentives to resist union wage demands.

Matching Key Terms and Concepts

Set I ___ 1. monopsonist ___ 2. the Wagner Act ___ 3. marginal factor cost (MFC) ___ 4. blacklists ___ 5. bilateral monopoly ___ 6. MRP = MFC ___ 7. the Taft-Hartley Act ___ 8. public employees ___ 9. yellow dog contracts ___10. the Clayton Act a. Guaranteed labor the right to organize unions. b. Now-outlawed agreements not to join unions. c. Exempted from the protection of the Wagner Act. d. Is a price maker as a buyer. e. Used to prevent union organizers from getting jobs. f. The equilibrium condition for inputs for all firms. g. Permits individual states to enact "right-to-work" laws that forbid the union-shop. h. Lies above the labor supply curve facing a monopsonist. i. Exempts most union activity from the Sherman Act. j. One of the earliest models of collective bargaining.

Byrns: Student Guide for Learning Contemporary Economics

425

Set II ___ 1. monopolistic exploitation ___ 2. agency shop ___ 3. "right-to-work" laws ___ 4. open shop ___ 5. perfect wage discrimination ___ 6. closed shop ___ 7. Taft-Hartley Act ___ 8. union shop ___ 9. monopsonistic exploitation ___10. minimum wage laws a. VMP > MRP = MFC = w. b. May eliminate inefficiencies of monopsony power. c. The closed-shop is illegal. d. VMP = MRP = MFC > w. e. If monopsony power exists, may cause increases in both wages and employment. f. All workers eventually must join a union. g. Only union members may be hired. h. Employment is not affected by union membership. i. Dues are paid by nonunion workers. j. Outlaw the union shop.

True/False Questions
___ 1. A labor monopsonist that does not wage discriminate hires fewer workers and pays lower wages than a perfectly competitive employer. ___ 2. Equilibrium employment falls for all firms when minimum legal wages rise. ___ 3. Firms maximize profits by buying resources until each input's marginal revenue product equals its marginal factor cost. ___ 4. Monopsonists confront perfectly elastic supplies of labor. ___ 5. Values of the marginal product equal the extra revenue that would be generated if a perfectly competitive seller of output hired extra units of a resource. ___ 6. Bilateral monopoly occurs when two powerful oligopolists share an output market, and is also known as duopoly. ___ 7. Firms can exercise either monopolistic exploitation or monopsonistic exploitation, but not both simultaneously. ___ 8. Wage discrimination cannot occur in equilibrium without monopsonistic exploitation of labor. ___ 9. There are incentives for employees not to share wage information if a firm follows a policy of wage discrimination. ___10. Unions existed in the U.S. before the Civil War.

426

Chapter 14 / 29: Imperfect Competition In Labor Markets

___11. Yellow dog contracts that require employees to agree not to join unions are still a popular union-busting technique. ___12. The Sherman Antitrust Act was originally used to prosecute unions on the grounds that strikes organizers were forbidden by the Taft Hartley Act to place firms that resisted union objectives on "blacklists" that required current union members to boycott these firms. ___13. One major affect of unions on labor markets is reductions in the extent of wage discrimination. ___14. Cost-push inflation is often blamed on labor unions because of wage increases negotiated through collective bargaining.

___15. In an average year, approximately 12 percent to 14 percent of the total labor force is involved in strikes. ___16. Strikes typically waste 6 to 10 percent of annual GDP. ___17. The typical gap in wages between comparable union and nonunion workers is roughly one third. ___18. Strikes tend to be settled because firms are eventually pressured to meet all union demands. ___19. All federal workers are now permitted to join unions and strike to ensure that the government collectively bargains in good faith. ___20. Union membership has recently declined to less than 12 percent of the U.S. labor force.

Standard Multiple Choice

Each question has one best answer.
___ 1. If a firm hires to the point where VMP > MRP = MFC = w: a. there is a bilateral monopoly situation. b. the firm has monopsony power. c. there is monopolistic exploitation of workers. d. monopolistic economic profits are necessarily being realized. e. wage discrimination is being exercised. ___ 2. The employer least likely to have monopsony power would be: a. a secretarial service firm in Chicago. b. the police force in Macon, Georgia. c. the U.S. Army. d. a lumber mill in Greer, Arizona. e. the community hospital in Pocatello, Idaho.

Byrns: Student Guide for Learning Contemporary Economics

427

___ 3. Unlike competitive employers, firms with monopsony power can: a. set any wage they want and hire as many workers as they desire. b. produce any amount and charge any price they want for output. c. be expected to try to maximize their profits. d. always wage discriminate to ensure monopolistic exploitation. e. pay workers wages less than MRP. ___ 4. When a firm's wage structure reflects the eagerness of individual employees to work, terms that are most applicable include: a. monopsonistic exploitation and wage discrimination. b. monopolistic exploitation and separation of ownership and control. c. surplus values and hedonistic preferences. d. wage peonage and capitalistic defoliation. e. third degree price discrimination and labor rent controls. ___ 5. An employer can legally follow a policy of: a. wage discrimination based on race or gender. b. closed shop agreements with unions. c. firing workers because they join unions. d. price discrimination based on cost differentials. e. telling other firms which job applicants are union sympathizers.

___ 6. Minimum wage laws are most likely to raise equilibrium employment if a firm has been exercising: a. monopoly power and price discrimination. b. employee selection in markets for unskilled workers. c. collective bargaining with an aggressive union. d. monopsony power without wage discrimination. e. racial discrimination in its hiring practices. ___ 7. When a powerful seller confronts a powerful buyer, there is: a. reciprocal exploitation. b. bilateral monopoly. c. dialectical bargaining. d. ancillary reciprocity. e. strategic bloc management. ___ 8. Agreements not to join unions were once common requirements for employment. Now outlawed, these are known as: a. yellow dog contracts. b. blacklist contracts. c. exclusionary provisions. d. employment screens. e. union busters. ___ 9. Industrial unions intend to organize all workers within: a. a particular company. b. the United States. c. a particular skill or craft. d. a specific occupation. e. a broad industry.

428

Chapter 14 / 29: Imperfect Competition In Labor Markets

___10. The idea that unions are more powerful than ever before is: a. supported by the effects of unions on inflationary spirals. b. reflected in the growing numbers of violent and costly strikes. c. contrary to the fact that union membership is declining. d. demonstrated by the growing political influence of unions. e. especially true in the cases of middle managers. ___11. The least likely result if unions succeed in raising their wages is that: a. wages in nonunion sectors will fall. b. employment will grow in nonunion sectors. c. barriers will be constructed to limit entry into unions. d. labor's share of national income will grow. e. nonunion firms will have competitive advantages over union firms. ___12. Prior to the AFL-CIO merger in 1955: a. the AFL was an alliance of industrial unions. b. the CIO was an alliance of craft unions. c. strikes over which unions would represent workers were common. d. the union movement was restricted to public employees. e. the union movement in the U.S. was declining.

___13. Strikes tend to be resolved after workers' savings trickle down into a discomfort zone and there is exhaustion of: a. public tolerance, causing government to set a fair settlement. b. managers and inventories, causing firms to raise their offers. c. diminishing returns to union leaders and business agents. d. labor force participation by nonunion "scabs." e. legal remedies that might correct managerial misbehavior. ___14. The Taft Hartley Act of 1946 made it illegal to have a: a. right-to-work law passed by a state legislature. b. conviction for a misdemeanor and serve as a union officer. c. union for agricultural migrants or government workers. d. closed shop agreement that prevents hiring nonunion workers. e. yellow dog contract or a blacklist of potential troublemakers. ___15. Union membership is most prevalent among: a. white collar workers. b. supervisors and managers. c. pink collar clerical workers. d. young, upwardly mobile, urban professionals. e. blue collar workers.

Byrns: Student Guide for Learning Contemporary Economics

429

___16. The union strategy that probably yields the highest wages for both union members and other workers over the long run is: a. restricting entry from particular occupations. b. lobbying for tariffs against imports that compete with union-produced goods. c. setting rigid rules for firms employing union workers to maximize "feather bedding." d. facilitating management plans to increase productivity. e. demanding uniform wage rates with premiums for seniority. ___17. Contracts requiring employment when some workers' jobs have been made obsolete by automation are examples of: a. blacklisting. b. featherbedding. c. check-off provisions. d. yellow dog contracts. e. labor-reducing protectionism. ___18. Nonunion members cannot "free-ride" in states with Right-to-Work laws if a company agrees to operate a/an: a. closed shop. b. union shop. c. open shop. d. agency shop. e. shoe shop.

___19. If a collective bargaining contract contains a "check-off provision": a. union workers can be fired if they do not meet production quotas. b. firms collect union dues by deducting them from paychecks. c. workers are required to do only tasks in their job descriptions. d. quality control in a plant is performed by union representatives. e. seniority creates a first right of refusal for layoffs, so older workers can choose to draw unemployment compensation or work. ___20. Workers who are now allowed to join unions but who still may not legally strike include: a. civilian federal employees. b. medical professionals. c. military personnel. d. elected state and local officials. e. television newscasters.

430

Chapter 14 / 29: Imperfect Competition In Labor Markets

Chapter Review (Fill-In Questions)

1. All firms maximize profits by hiring inputs until their _______________ equal their _______________. 2. If a firm with monopoly power is a competitive employer, the VMP _______________ the MRP, so profit-maximizing equilibrium occurs where _______________. 3. _______________ is a primitive model of collective bargaining in which a monopsony firm deals with a monopoly union. However, the model only determines the _______________ in which wage contracts will fall, not the precise wage rate that will be the outcome of bargaining. 4. _______________ unions are organized along occupational lines, while _______________ unions include all workers in an industry. 5. When employment is denied to everyone not a union member, there is a(n) _______________ agreement, which is a violation of the _________________________. 6. _______________ shops, for which a worker must join a union to maintain employment, are legal unless a state has passed a(n) _______________. 7. Union membership is irrelevant for employment in a(n) _______________, but non-union members still pay dues if a(n) _______________ arrangement exists. 8. Because both union and non-union workers get the same benefits, an agency shop agreement is one means by which non-union workers are prevented from being _______________. Firms deduct union dues from workers' paychecks when contracts include _______________ provisions. 9. Widespread concern about growth in union power is probably misplaced. It is dubious that union wage demands cause substantial _______________. In typical years, only _______________ percent of all workers are on strike.

Byrns: Student Guide for Learning Contemporary Economics

431

Unlimited Multiple Choice

Each question has from zero to four correct responses. ___ 1. The labor union in a given industry can increase its members' wage rates by implementing policies: a. with firms in the industry to increase labor productivity. b. that decrease the supply of union workers in the industry. c. that increase the demand for union labor. d. of featherbedding. ___ 2. A profit maximizing monopsonist in the labor market always hires more workers up to the point where the: a. value of labor's marginal product equals its marginal factor cost. b. marginal revenue product of labor equals its marginal factor cost. c. wage rate is the lowest possible proportion of the marginal factor cost of labor. d. wage rate just equals labor's marginal factor cost. ___ 3. The bilateral monopoly model: a. is one of the most modern theories of collective bargaining. b. specifies equilibrium price when one buyer deals with one seller. c. is useful in explaining the limits to bargaining between a monopsonistic buyer and a monopolistic seller of labor services. d. describes in general terms the boundaries for wage negotiations. ___ 4. A labor monopsonist that cannot wage discriminate to take advantage of different people's willingness to work confronts a: a. perfectly wage elastic supply curve of labor. b. marginal factor cost of labor that is upward sloping and above the labor supply curve. c. positively sloped labor supply curve. d. fixed wage that it must pay, but may then hire as many workers as it chooses. ___ 5. A nondiscriminating firm that is both a monopolist in the output market and a monopsonist in the labor market will employ workers until the: a. value of labor's marginal product equals its marginal factor cost. b. marginal revenue product of labor equals the value of labor's marginal product. c. wage rate most greatly exceeds the marginal factor cost of labor. d. marginal revenue product of labor is equal to the wage rate.

432

Chapter 14 / 29: Imperfect Competition In Labor Markets

Problems
Problem 1 This table contains data on the wage rate (w) structures for two firms that are in perfect competition in different output markets. Use this information to answer the following questions. Firm A Total Labor Cost Firm B Total Labor Cost

L 0 1 2 3 4 5 6 7 8 9 10

w 10 10 10 10 10 10 10 10 10 10 10

MFC

MRP -12.50 12.00 11.50 11.00 10.50 10.00 9.50 9.00 8.50 8.00

L 0 1 2 3 4 5 6 7 8 9 10

w 5.00 5.50 6.00 6.50 7.00 7.50 8.00 8.50 9.00 9.50 10.00

MFC

MRP -13.00 12.50 12.00 11.50 11.00 10.50 10.00 9.50 9.00 8.50

a. Complete the Table. b. What type of firm is Firm A in the labor market? _______________ Why? _____________ ______________________________________________________________________ c. What type of firm is Firm B in the labor market? ________________ Why? _____________ ______________________________________________________________________ d. Plot the wage rate (w), the marginal factor cost (MFC), and marginal revenue product (MRP) curves for both firms in the figure below. e. Firm A will hire ________ workers at an hourly wage rate of __________. f. Firm B will hire ________ workers at an hourly wage rate of ___________.

g. Total monopsonistic exploitation by Firm B is __________.

Byrns: Student Guide for Learning Contemporary Economics

433

Problem 2 This figure shows the revenue and cost curves in different labor markets for two different firms. Use this information to answer the following true/false questions.

___ a. Firm A is a price maker in the output market. ___ b. Firm A is able to influence the wage rate of the labor service that it purchases. ___ c. Firm B is a competitive seller in the output market.

___ d. Firm B is a price taker in the input market. ___ e. Firm A will hire L0 workers in equilibrium. ___ f. Firm B will hire L1 workers in equilibrium.

434

Chapter 14 / 29: Imperfect Competition In Labor Markets

___ g. In equilibrium, Firm A will pay a wage of W0. ___ h. In equilibrium, Firm B will pay a wage of W2. ___ i. The labor supply curve that confronts Firm A is also its marginal factor cost curve. ___ j. The labor supply curve that confronts Firm B is also its marginal factor cost curve.

___ k. For Firm B, the line segment ae represents the degree of monopolistic exploitation per unit of labor. ___ l. For Firm A, the line segment ab represents the degree of monopsonistic exploitation per unit of labor.

Problem 3 This figure depicts the revenue and cost curves of two firms hiring from different labor markets. Use this information to answer the following true/false questions.

___ a. Firm A is a price taker in the input market. ___ b. Firm A is a price taker in the output market. ___ c. Firm B is a price maker in the output market. ___ d. Firm B is a price maker in the input market.

___ e. Firm A will hire L0 labor to maximize profits. ___ f. Firm A will pay a wage of 0W2 to maximize profits. ___ g. Firm B incurs total labor costs equal to area W0Za.

Byrns: Student Guide for Learning Contemporary Economics

435

___ h. Firm A incurs total labor costs equal to area 0W0eL0. ___ i. Firm A's derived demand for labor is actually the value of the marginal product curve. ___ j. Firm A will hire L0 workers at a wage of 0W5. Problem 4

___ k. If Firm A hires L0 workers for a wage of W0, line segment fb is the degree of monopolistic exploitation and line segment be is the degree of monopsonistic exploitation. ___ l. Firm B pays workers the value of their marginal products and no exploitation of labor results.

Use the information contained in this table, concerning the output and demand for your latest product--dehydrated water, to answer the following questions. L 0 1 2 3 4 5 6 7 Q 0 60 100 136 168 196 220 240 P --200 180 160 140 120 100 80 TR MR MPP MRP VMP w --200 300 400 800 1,200 1,500 1,800 TCL MFC

a. Fill in the columns for total revenue (TR), marginal revenue (MR), marginal physical product (MPP), marginal revenue product (MRP), and the value of the marginal product (VMP). b. If labor is purchased from a competitive market and the wage rate is $400 per unit of labor (L), how many units of labor will you hire? _________ c. Given your answer in question b, what is the extent of your monopolistic exploitation? ______ Suppose that all your competitors for the services of professional water dehydrators go bankrupt, and you become a monopsonist facing the wage rate (w) shown in the table. d. Fill in the columns for total cost of labor (TCL) and marginal factor cost (MFC). e. How many workers will you employ now that you are a monopsonist? __________ f. Given your answer in question f, what is the extent of both your monopolistic and monopsonistic exploitation? ____________

436

Chapter 14 / 29: Imperfect Competition In Labor Markets

ANSWERS
Matching Set I Set II 1. d 1. a 2. a 2. i 3. h 3. j 4. e 4. h 5. j 5. b 6. f 6. g 7. g 7. c 8. c 8. f 9. b 9. d 10. i 10. e True/False 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. T F T F T F F T T T 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. F T T T F F F F F T Multiple Choice 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. c a e a d d b a e c 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. d c b d e d b d b a Unlimited MC 1. 2. 3. 4. 5. abcd b cd bc none

Chapter Review (Fill-in Questions) 1. 2. 3. 4. 5. 6. 7. 8. 9. marginal revenue products (MRP); marginal factor costs (MFC) exceeds; VMP > MRP = MFC = W Bilateral monopoly; range Craft; industrial closed shop; Taft-Hartley Act Union; right-to-work law open shop; agency shop free riders; check-off inflation; 2 to 4

Problems Problem 1 a. b. c. d. e. f. g. See table below. Perfectly competitive; a fixed wage rate faces the firm. The firm has monopsony power; the firm can use its hiring decision to influence the wage rate it pays. See figure below. 6; $10. 6; $8. ($10.50 - 8.00) 6 = $15.00. Problem 2 a. b. c. d. e. f. T F T F F T g. h. i. j. k. l. T F T F F F Problem 3 a. b. c. d. e. f. F. F F F T F g. h. i. j. k. l. F T F F T T

Byrns: Student Guide for Learning Contemporary Economics

437

L 0 1 2 3 4 5 6 7 8 9 10

w 10 10 10 10 10 10 10 10 10 10 10

Firm A Total Labor Cost 0 10 20 30 40 50 60 70 80 90 100

MFC 10 10 10 10 10 10 10 10 10 10 10

MRP -12.50 12.00 11.50 11.00 10.50 10.00 9.50 9.00 8.50 8.00

L 0 1 2 3 4 5 6 7 8 9 10

w 5.00 5.50 6.00 6.50 7.00 7.50 8.00 8.50 9.00 9.50 10.00

Firm B Total Labor Cost 0 5.50 12.00 19.50 28.00 37.50 48.00 59.50 72.00 85.50 100.00

MFC -5.50 6.50 7.50 8.50 9.50 10.50 11.50 12.50 13.50 14.50

MRP -13.00 12.50 12.00 11.50 11.00 10.50 10.00 9.50 9.00 8.50

Problem 4 a. b. c. d. e. f. See table below. 4 (closest MRP above wage rate) $2,720 ($4,480 - $1,760) See table below. 3 (closest to intersection of MFC and MRP where MFC < MRP) $5,360 ($5,760 - $400)
L 0 1 2 3 4 5 6 7 Q 0 60 100 136 168 196 220 240 P --200 180 160 140 120 100 80 TR 0 12,000 18,000 21,760 23,520 23,520 22,000 19,200 MR -200 150 104.4 55 0 -63.3 -140 MPP -60 40 36 32 28 24 20 MRP -12,000 6,000 3,758.4 1,760 0 -1,519.2 -2,800 VMP -12,000 7,200 5,760 4,480 3,360 2,400 1,600 w --200 300 400 800 1,200 1,500 1,800 TCL 0 200 600 1,200 3,200 6,000 9,000 12,600 MFC -200 400 600 2,000 2,800 3,000 3,600

438

Chapter 14 / 29: Imperfect Competition In Labor Markets