Appendix
LABOR UNIONS
„ Monopsony
Key Concepts
A monopsony is a market in which there is a single
buyer. A firm that is the only employer in town is a
monopsonist in the labor market.
♦ A monopsony determines what wage it will pay and
pays the lowest wage that lets it hire the number of
workers it wants to employ.
„ Market Power in the Labor Market
A labor union is an organized group of workers that
aims to increase wages and influence other job conditions.
♦ Craft union — a group of workers with similar skills
working for different companies.
♦ Industrial union — a group of employees with different skills working in the same industry or firm.
Unions negotiate with employers using collective bargaining. Unions’ objectives for their members include
increasing compensation, improving working conditions, and expanding job opportunities. Methods of
achieving these objectives include:
♦ restricting the supply of labor.
♦ increasing the demand for union labor and/or
making it more inelastic.
Unions work to increase the demand for their members’ labor by raising the marginal product of their
members, encouraging import restrictions, supporting
minimum wage laws, supporting immigration restrictions, and increasing the demand for the product produced by their members.
In competitive labor markets, unions have the following effects:
♦ In unionized labor markets, the increased demand
and decreased supply raise union members’ wages
and incomes. If the supply decreases more than the
demand increases, the quantity of employment falls.
After allowing for differences in skills, the unionnonunion wage differential is between 10 and 25 percent.
FIGURE A14.1
Wage rate (dollars per hour)
A Monopsony Labor Market
MCL
15
S
12
9
6
MRP
3
0
100
200
300
600
400 500
Labor (hours per day)
To hire more labor, a monopsony must pay a higher
wage to all its workers. Because it raises the wage it pays
all workers, for a monopoly the marginal cost of labor
exceeds the wage paid the new worker. As illustrated in
Figure A14.1, the marginal cost of labor curve (MCL)
for the monopsony slopes upward and lies above the
supply curve (S) of labor.
The profit-maximizing rule for a monopsony is to (1)
hire the quantity of labor indicated by the intersection
263
264
CHAPTER 14
of the MCL curve and the MRP curve, and (2) then use
the labor supply curve to offer the lowest wage rate
possible that allows it to hire the quantity of labor it
wants. In Figure A14.1, the monopsony hires 300
hours of labor and pays $6 per hour.
♦ With a monopsony, employment and the wage rate
are lower than in a competitive labor market. In
Figure A14.1 a competitive labor market would result in employment of 400 hours of labor and a
wage rate of $9 per hour.
♦ If the monopsonist faces a union, the labor market
is characterized as a bilateral monopoly. In this
case the wage rate is determined by the relative bargaining strengths of the firm and the union.
♦ A minimum wage law can affect the outcome in a
monopsony market. The minimum wage makes labor supply perfectly elastic at the minimum wage so
that the MCL falls to equal the minimum wage. In
response, the monopsonist hires more labor and
pays a higher wage rate.
Helpful Hints
1. SIMILARITIES BETWEEN MONOPSONY AND
MONOPOLY : There is a close parallel between (a)
the relationship between the labor supply curve and
the MCL curve for a monopsony, and (b) the relationship between the demand curve and the marginal revenue curve, MR, for a monopoly discussed
in Chapter 12. Both relationships stem from market power: a monopsony sets the wage it pays and a
monopoly sets the price it charges.
The monopoly, as the only seller in an output market, faces a downward-sloping demand curve. The
marginal revenue from the sale of an additional
unit of output is less than the price because the
monopolist must lower the price on all the units it
sells, not only the one new unit but also all previous units sold as well. So the MR curve lies below
the demand curve for the single-price monopoly.
The monopsony in a labor market faces an upward
sloping labor supply curve. The marginal cost of
hiring an additional unit of labor is higher than the
wage because the monopsony must raise the wage
for all the workers it hires, not only the one new
worker but also all previous workers hired. So the
MCL curve lies above the labor supply curve for the
monopsony.
Questions
„ True/False and Explain
Market Power in the Labor Market
11. Unions try to improve their members’ working
conditions.
12. A closed shop refers to a firm that is not operating
because its workers are on strike.
13. Unions support minimum wage laws in part because they raise the cost of low-skilled labor, a substitute for high-skilled union labor.
14. Most union members earn about 50 percent more
than nonunion workers in comparable jobs.
Monopsony
15. For a monopsony, the marginal cost of hiring another worker is less than the wage it must pay.
16. A monopsony determines the amount of labor it
hires by where the MCL curve crosses the labor
supply curve.
17. A monopsony pays a higher wage rate than would
be paid in a perfectly competitive labor market.
„ Multiple Choice
Market Power in the Labor Market
11. An arrangement in which workers can be employed
without joining a union is a (an)
a. non-union shop.
b. union shop.
c. closed shop.
d. open shop.
12. Unions attempt to do all of the following EXCEPT
a. increase the demand for their members’ labor.
b. decrease the supply of labor in their market.
c. lower the price of labor.
d. raise the wage paid their members.
13. Which of the following would unions be most likely
to support?
a. Decreasing the legal minimum wage.
b. Encouraging immigration.
c. Restricting imports.
d. Decreasing demand for the goods that their
workers produce.
APPENDIX: LABOR UNIONS
265
14. With competitive labor markets, in a unionized labor market, unions ____ the wage rate and ____
employment.
a. lower; decrease
b. lower; increase
c. raise; decrease
d. raise; increase
Monopsony
15. In order to hire an additional worker, a monopsony
must pay
a. a higher wage rate than it paid before.
b. the same wage rate it paid before.
c. a lower wage rate than it paid before.
d. a wage rate that is sometimes higher, sometimes
lower, and sometimes the same as before, depending on its labor supply curve.
16. For a monopsony, the MCL curve
a. lies above the labor supply curve.
b. is the same as the labor supply curve.
c. lies below the labor supply curve.
d. is the same as the labor demand curve.
FIGURE A14.2
Wage rate (dollars per hour)
Multiple Choice Questions 7, 8, 9, 10
MCL
S
Wb
Wa
MRP
La
Lb
19. If Figure A14.2 illustrates a perfectly competitive
labor market, the level of employment is
a. La .
b. Lb .
c. Lc .
d. none of the above.
10. If Figure A14.2 illustrates a perfectly competitive
labor market, the wage rate is
a. W a .
b. W b .
c. W c .
d. none of the above.
11. A bilateral monopoly occurs when a
a. group of unorganized firms bargain with a group
of unorganized workers.
b. single monopsony firm bargains with a group of
unorganized workers.
c. group of unorganized firms bargains with a union representing the workers.
d. monopsony bargains with a union representing
the workers.
Use Figure A14.2 for the next four questions.
Wc
18. If Figure A14.2 illustrates a monopsony, the wage
rate is
a. W a .
b. W b .
c. W c .
d. none of the above.
Lc
Labor (hours per day)
17. If Figure A14.2 illustrates a monopsony, the level of
employment is
a. La .
b. Lb .
c. Lc .
d. none of the above.
12. If a strike or lockout occurs in a bilateral monopoly
situation, it usually is because the
a. demand for labor is relatively inelastic.
b. supply of labor is relatively inelastic.
c. firm is not maximizing its profit.
d. union or firm has misjudged the bargaining
situation.
13. A minimum wage can lead a monopsony to
a. lower its wage rate and lower its level of
employment.
b. increase employment.
c. lower its wage rate and increase its level of
employment.
d. none of the above.
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CHAPTER 14
„ Short Answer Problems
TABLE A14.1
FIGURE A14.3
Unionized Industry
Wage rate (dollars per hour)
Short Answer Problems 1 and 2
Quantity
demanded
Wage rate
(dollars per hour) (thousands of
workers)
15
S
12
9
6
D
Quantity
supplied
(thousands of
workers)
$4
150
140
5
145
140
6
140
140
7
135
140
8
130
140
9
125
140
10
120
140
3
TABLE A14.2
0
100
200
300
600
400 500
Labor (hours per day)
1. Figure A14.3 shows a competitive labor market.
The initial equilibrium wage rate is $9 an hour, and
the level of employment is 400 hours. Suppose that
a union organizes and raises the wage rate to $12
an hour. In the figure, illustrate what happens to
the level of employment. Is there any unemployment? What happens in the long run?
2. Suppose that the union in problem 1 manages to
make the demand for its members more inelastic.
The wage rate stays at $12 an hour. What effect
does making the demand more inelastic have on
the amount of employment? The amount of unemployment?
3. Table A14.1 shows the demand and supply of labor
for one industry in the economy. (For simplicity,
the supply is assumed to be perfectly inelastic.)
a. What is the equilibrium quantity of labor employed? The equilibrium wage rate?
b. A union organizes in this industry and negotiates a raise in the wage rate to $8 an hour. Now
what is the level of employment? Is there any
unemployment?
4. Continuing with the situation in Problem 3, suppose that after the union negotiates the higher wage
rate, all the workers who cannot find employment
leave the first industry and switch to a second.
a. The initial labor demand and supply schedules
for the second industry are shown in Table
Nonunionized Industry
Wage rate Quantity Initial quantity New quantity
supplied
supplied
(dollars per demanded
(thousands (thousands of (thousands of
hour)
workers)
workers)
of workers)
$4
150
140
____
5
145
140
____
6
140
140
____
7
135
140
____
8
130
140
____
9
125
140
____
10
120
140
____
A14.2. Complete the table showing the new
quantity of labor supplied.
b. Based on Table A14.2, before the first industry
became unionized, what was the equilibrium
wage rate in the second industry? After the first
industry was unionized, what is the equilibrium
wage rate in the second industry?
c. After the first industry is unionized, what is the
wage differential between the two industries?
5. Most members of labor unions earn wages well
above the minimum wage. Why, then, do unions
support raising the legal minimum wage?
6. Table A14.3 (on the next page) shows the supply of
nurses facing North Towne Hospital, the only employer of nurses in a small town.
a. Calculate the values for the MCL column and
complete the table.
APPENDIX: LABOR UNIONS
267
TABLE A14.3
North Towne Hospital
Labor
Wage rate
(dollars per demand
(workers)
day)
Labor
supply
(workers)
$20
10
2
30
9
3
40
8
4
50
7
5
60
6
6
70
5
7
80
4
8
Marginal cost of
labor, MCL
(dollars per hour)
____
____
____
____
____
b. Plot the labor demand, labor supply, and MCL
schedules in Figure A14.4.
c. How many nurses does North Towne hire?
What wage rate does North Towne pay?
d. Suppose there were many hospitals so that the
market for nurses was perfectly competitive
rather than a monopsony. In this case, how
many nurses would be hired and what wage rate
would they be paid?
e. How does the wage rate that North Towne pays
when it is a monopsony compare with the wage
rate paid if the market was perfectly competitive? How does the number of nurses hired
compare in the two cases?
____
____
90
3
9
FIGURE A14.4
Wage rate (dollars per day)
Short Answer Problem 6 (b)
180
150
120
90
60
30
0
1
2
3
4
5
6 7 8 9 10
Nurses (number per day)
„ You’re the Teacher
1. “Unions ought to be banned. After all, they’re just
monopolies operating in a labor market! And my
bet is that they somehow cause inefficiency!” React
to the student’s statement and then explain how
unions do, indeed, result in inefficiency.
268
CHAPTER 14
„ True/False Answers
Market Power in the Labor Market
11. T Improving their members’ working conditions is
one of the union’s goals.
12. F A closed shop is a factory or business in which a
worker must be a union member in order to
work at a particular job.
13. T By raising the cost of substitute inputs, such as
low-skilled workers, unions increase the demand
for their members’ labor.
14. F Union members earn about 10 to 25 percent
more than nonunion workers with comparable
jobs.
Monopsony
15. F The marginal cost of hiring another worker exceeds the wage rate that must be paid.
16. F The level of employment is determined where
the MCL curve crosses the MRP curve.
17. F A monopsony exploits its market power by paying a lower wage rate.
„ Multiple Choice Answers
Market Power in the Labor Market
11. d The question defines an open shop.
12. c Unions strive to raise the price of labor, the wage
rate.
13. c Imports are produced by foreign labor, which is
a substitute for domestic, union labor. Hence
unions try to restrict imports.
14. c By raising the wage rate that must be paid their
members, unions decrease employment in the
unionized industry.
Monopsony
15. a The monopsony must pay the higher wage to all
the workers it employs, so the marginal cost of
hiring another worker exceeds the wage rate.
16. a As Figure A14.5 shows, the MCL curve is above
the labor supply curve.
FIGURE A14.5
Multiple Choice Question 6
Wage rate (dollars per hour)
Answers
MCL
S
Labor (hours per day)
17. b A monopsony determines the level of employment by setting the marginal cost of labor (the
MCL) equal to the marginal revenue product of
labor (the MRP) so it hires Lb labor.
18. a The monopsony hires Lb labor. The supply
curve indicates that the lowest wage rate it can
pay and still hire this amount of labor isWa .
19. c In a perfectly competitive labor market, the
equilibrium quantity of labor is determined by
the intersection of the supply curve and demand
curve, which is the same as the MRP curve.
10. b The last four answers show that a monopsony
pays a lower wage rate and hires fewer workers
then in a perfectly competitive labor market.
11. d Bilateral monopoly occurs when both the demand side and supply side of a market are monopolies.
12. d By misjudging the situation, either the union or
firm might make an offer that it does not realize
will drive the other to close the company
through a lockout or strike.
13. b In a competitive labor market, a minimum wage
decreases employment, but it might increase
employment in a monopsony labor market.
APPENDIX: LABOR UNIONS
269
„ Answers to Short Answer Problems
FIGURE A14.7
Short Answer Problem 2
FIGURE A14.6
15
Wage rate (dollars per hour)
Wage rate (dollars per hour)
Short Answer Problem 1
S
12
9
15
S
12
9
6
6
D0
D
3
D1
3
0
0
100
200
300
100
200
600
400 500
Labor (hours per day)
1. Figure A14.6 shows the union’s effect on this labor
market. After the rise in the wage to $12 an hour
firms in the industry hire only 200 hours of labor
per week. Employment falls from 400 hours to 200
hours. Unemployment results. The amount of unemployment will depend on how many workers believe that they will find work at the wage rate of $12
an hour. The supply curve of labor shows that at
this wage rate, 500 hours of labor are supplied.
Therefore there can be unemployment up to 300
hours of labor a week (500 hours – 200 hours), the
length of the gray arrow.
2. If the union is able to make demand for its labor
more inelastic, the demand curve changes as illustrated in Figure A14.7. Demand D 1 is more inelastic than the initial demand, D 0 , because the
percentage reduction in the quantity of labor demanded as a result of the higher wage rate is less
along D 1 than along D 0 . When demand is more
inelastic, the decrease in employment from the
higher wage is smaller, with employment falling
only to 300 hours rather than all the way to 200
hours per week. (The accompanying increase in unemployment from the higher wage also is smaller.)
This answer shows why unions strive to make the
demand for their members’ labor less elastic: It
partly offsets the adverse employment effect from
the higher union wage rate.
300
600
400 500
Labor (hours per day)
3. a. The equilibrium quantity of labor employed is
140,000 workers and the equilibrium wage rate
is $6 an hour.
b. Once the union negotiates a wage of $8, firms
decrease the quantity of employment they demand to 130,000. Hence employment now
equals 130,000. Unemployment equals the
number of workers willing to work at $8 an
hour (140,000) minus the number actually employed (130,000), so unemployment is 10,000.
TABLE A14.4
Nonunionized Industry
Wage rate Quantity Initial quantity New quantity
supplied
supplied
(dollars per demanded
(thousands (thousands of (thousands of
hour)
workers)
workers)
of workers)
$4
150
140
150
5
145
140
150
6
140
140
150
7
135
140
150
8
130
140
150
9
125
140
150
10
120
140
150
4. a. Table A14.4 shows the new situation in the
nonunionized industry. The 10,000 unemployed
workers who could no longer find work in the
unionized industry have switched to the nonun-
270
CHAPTER 14
FIGURE A14.8
Short Answer Problem 6 (b)
Wage rate (dollars per day)
ionized industry, thereby increasing the supply
of labor in this industry.
b. Before the first industry was unionized, the
equilibrium wage rate in the second industry was
$6 an hour because this wage rate equated the
quantity of labor demanded to the (old) quantity
of labor supplied. After the first industry became
unionized, the wage rate in the second industry
falls to $4 an hour because this wage rate equates
the quantity demanded of labor to the (new)
quantity supplied.
c. The union-nonunion wage differential is $4.
This differential equals the $2 rise in the wage
rate in the unionized industry and the $2 drop
in the wage rate in the nonunionized industry.
5. A rise in the minimum wage boosts the cost of hiring low-skilled labor. Low-skilled labor can substitute — to an extent — for high-skilled union labor.
Hence the rise in the cost of low-skilled labor increases the demand for high-skilled labor and makes
sustaining its higher wage easier for the union.
180
150
120
30
D
0
b.
Labor
Wage rate
(dollars per demand
(workers)
day)
Labor
supply
(workers)
$20
10
2
30
9
3
40
8
4
50
7
5
60
6
6
70
5
7
80
4
8
90
3
9
c.
Marginal cost of
labor, MCL
(dollars per hour)
$50
70
90
110
d.
130
150
170
e.
6. a. Table A14.5 shows the marginal cost of labor,
the MCL. To calculate these values, consider the
MCL between 2 and 3 workers. The marginal
cost of labor is (∆ total wages) ∆ L . Total wages
equals the number of workers employed times
the wage rate, so for 2 nurses it is $20 times 2
workers, or $40 and for 3 nurses it is $90. So the
MCL between 2 and 3 workers is equal to
S
90
60
TABLE A14.5
Short Answer Problem 6 (a)
MCL
1
2
3
4
5
6 7 8 9 10
Nurses (number per day)
($90 − $40) ( 3 − 2) = $50 . The rest of the MCLs
in the table are calculated similarly.
Figure A14.8 contains plots of the labor demand, labor supply, and MCL schedules.
As Figure A14.8 illustrates, North Towne hires
4 nurses because employing this number of
nurses sets the marginal cost of labor equal to
the marginal revenue product of labor, given by
the demand curve. This number of workers is
the amount determined by the intersection of
North Towne’s MCL curve and its labor demand curve. The labor supply curve shows that
4 nurses will work for $40 a day, so North
Towne pays a wage rate of $40 a day.
If the labor market was perfectly competitive, the
intersection of the demand curve for labor and
the supply curve of labor shows the quantity of
labor employed. Figure A14.8 indicates that 6
nurses would be the equilibrium level of employment and that the equilibrium wage rate
would be $60 a day.
North Towne hires fewer workers and pays them
a lower wage when it is a monopsony.
„ You’re the Teacher
1. “Well, it’s your view that unions ought to be
banned. This is your normative judgment, and I
might agree or disagree with it. But I will agree with
your positive — not normative — guess that unions
APPENDIX: LABOR UNIONS
create inefficiency. The way to see this result is fairly
straightforward. Perfectly competitive firms produce
the efficient level of output. To do so, they have to
hire the efficient level of employment. But unions
restrict the level of employment in order to boost
271
their members’ wage rates. Hence firms can’t hire
the ‘right’ number of workers, and thus they can’t
produce the ‘right’ level of output. Therefore unions, like monopolies, create inefficiency and deadweight losses.”
272
CHAPTER 14
Chapter Quiz
11. The type of union an autoworker belongs to is
a. an open shop union.
b. a craft union.
c. an industrial union.
d. a closed union.
12. Why do unions try to increase the demand for their
members’ labor?
a. Because if the demand for their members’ labor
increases, the wage rate paid their members as
well as the level of employment both increase.
b. Because unions are unable to decrease the supply
of labor, so in order to raise their members’ wage
rates, they must increase the demand for labor.
c. The premise of the question is incorrect because
unions do not try to increase the demand for
their members’ labor.
d. None of the above answers is correct.
13. A union that only manages to restrict the supply of
labor in its market ____ its member’s wage rates and
____ their employment.
a. raises; increases
b. raises; decreases
c. lowers; increases
d. lowers; decreases
14. A shop that hires only union members is
a. an open shop.
b. a closed shop.
c. a union shop.
d. None of the above.
15. Unions support
a. repealing minimum wage laws.
b. encouraging immigration.
c. import restrictions.
d. All of the above.
16. A market with a single buyer is
a. a monopoly.
b. a union market.
c. a monopsony.
d. illegal.
17. An economy has two sectors, industry and services.
Labor markets in both are initially competitive. If a
union forms in the industrial labor market, wage
rates in the industrial sector ____ and wages rates in
the service sector ____.
a. rise; rise
b. rise; fall
c. fall; rise
d. fall; fall
18. Compared to a perfectly competitive market, a monopsony firm pays a ____ wage rate and hires ____
labor.
a. higher; more
b. high; less
c. lower; more
d. lower; less
19. If a minimum wage above the existing wage rate is
imposed in a monopsony labor market, then
a. it is possible for both the wage rate and level of
employment to increase.
b. employment definitely decreases, but the effect
on the wage rate is ambiguous.
c. employment definitely decreases and the wage
rate definitely increases.
d. None of the above answers is correct.
10. The Taft-Hartley Act in 1947 made illegal
a. all labor unions.
b. craft unions.
c. professional associations.
d. closed shops.
The answers for this Chapter Quiz are on page 368