Chapter 12

Labor Markets and

Labor Unions

© 2009 South-Western/ Cengage Learning

S

Exhibit 1Individual labor supply curve for unskilled work

2

200 4030 48 6055

Hours of labor per week

$1413

1112

910

78

Wag

e ra

te p

er h

our

Substitution effect outweighs the income effect : quantity of labor a worker supplies increases with the wage

Above some wage, shown here at $12 per hour, the income effect dominates: S curve bends backward. Further increases in the wage reduce the quantity of labor supplied

Wages and Individual Labor Supply

• Individual labor supply– Backward bending

– Income effect of higher wage• Eventually dominates substitution effect

• Flexibility of hours worked– Part-time; overtime

– Timing and length of vacation

– School

– Retire 3

Nonwage Determinants of Labor Supply

– Other sources of income

– Nonmonetary factors– Difficulty of the job– Quality of work environment– Status of the position

– Value of job experience

– Taste for work

• Market supply of work– Horizontal sum of all the individual supply

curves 4

Exhibit 2Deriving the market labor supply curve from individual labor supply curves

5

Wag

e ra

te

Labor0

SA

(a) Individual A

Labor0

SB

(b) Individual B

Labor0

SC

(c) Individual C

Labor0

S

(d) Market supply

Why Wages Differ

• Differences in– Training, Education, Age

– Experience

– Ability

– Risk

• Geographic differences• Discrimination• Union membership

6

S

s

Exhibit 5Effects of labor union’s wage floor

7

No union: market wage is W. Each firm can hire as much labor as it wants. The firm hires more labor until MRP=W: e units of labor; industry employment is E.

(a) Industry

Wag

e ra

te

W’

W

(b) Firm

D

Wag

e ra

te

W’

W

d=Marginal

revenue product

Labor

per periode0 e’Labor

per periodE0 E’’E’

s’a

Union negotiates wage W’, above the market wage W; the supply curve facing the firm shifts up from s to s’. Each firm hires less labor, e’; industry employment falls to E’; excess quantity of labor supplied = E’’-E’.