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EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with...
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Transcript of EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with...
EA Session 21: EA Session 21: August 24, 2007August 24, 2007
Overview• Factor Markets with Monopsony Power
• Factor Markets with Monopoly Power
• Wage discrimination across unionized & non-unionized labor (optional)
• Bilateral Monopoly (monopolist seller of labor facing a monopsonist buyer)
• The Decline of Private Sector Unionism in USA
Factor Markets with Monopsony Power
• Assume– The output market is perfectly competitive.– Input market is pure monopsony.
• Monopsonist forcing wage determination on seller’s supply curve,i.e., forcing labor to get only its minimum supply price.
• Examples of Monopsony Power– Government
• Soldiers• Missiles• B2 Bombers
– NASA• Astronauts
– Company town
SL = Average Expenditure (AE)
MarginalExpenditure (ME)
Why is marginal expendituregreater than SL?
D = VMPL
Marginal and Average Expenditure under monopsony (typology 3:
Competitive seller)
Units of Input
Price(per unitof input)
0 1 2 3 4 65
5
10
15
20
wM = 13
LM
wc
Lc
C
WM
WM< WC
LM< LC
Extent of monopsonisticexploitation
SL = Average Expenditure (AE)
MarginalExpenditure (ME)
Why is marginal expendituregreater than SL?
D = VMPL
Marginal and Average Expenditure under monopsony (typology 4:
monopolist seller)
Units of Input
Price(per unitof input)
0 1 2 3 4 65
5
10
15
20
WM = 13
L*
wc
Lc
C
D=MPL.MRLMM LM
WMM
WMM< WM
LMM< LM
M=monopsonistMM=monopolistcum monopsonist
Extent of exploitation
Factor Markets with Monopoly Power & Alternative Objectives of
Unions
• Just as buyers of inputs can have monopsony power, sellers of inputs can have monopoly power.
• The most important example of monopoly power in factor markets involves labor unions.
• Unions have one of the following three objectives– Maximizing wage rate (WM, LM), M=monopoly situation; – Maximizing wage bill (W2, L2);– Maximizing employment (WC, LC); C=competitive situation
EconomicRent
w1
L1
The quantity of labor L1 that maximizesthe rent that employees earn is determinedby the intersection of the marginal revenueand supply or labor curves; union members
receive a wage rate of w1.
SL
DL
MR
Monopoly Power of Sellers of Labor (typology 5)
Number of Workers
Wageper
worker
A
L2
w2
Finally, if the union wishes to maximize totalwages paid to workers, it should allow L2
union members to be employed at a wagerate of w2 because the marginal revenueto the union will then be zero.
L*
w*
WM=
WC=WM> WC
LM< LC
LM= LC=
B
C
Note exploitation of labor=0 at A, B, C
EconomicRent
w1
L1
M=only monopolist seller of labor, indicated by points A, B, C
SL
DL
MR
Monopoly Power of Sellers of Labor coupled with Producer Monopoly
Power (typology 6)
Number of Workers
Wageper
worker
A
L2
w2
MM=monopolist seller of labor facing monopolist producer, Indicated by points A’, B’, C’
L*
w*
D’L for monopolist
MR’
WC=
WM=
LMM =LM
WMM< WM
LMM< LM
WMMB
C
A’
B’
C’
Implications of monopoly sale of labor • Seller of labor forcing wage
determination along the demand curve of labor (i.e., trying to realize the full demand price of labor), depending upon whether the seller of product is a competitor (demand for labor being VMPL) or a monopolist (demand for labor being MRPL)
• A Two-Sector Model of Labor Employment– Union monopoly power impacts the
non-unionized part of the economy.
Factor Markets with Monopoly Power
Wage Determination/discrimination inUnionized and Non-unionized Sectors
(optional)
MCU
MCNU
D
DUMRU
WC
WU
LCLU
D is total demand for labor, assuming that both union and non-union labor are physically identical
DU is demand for union labor, which - due to the union activities - takes precedence over demand for non-union labor
LC is total labor employed (sum of union i.e. LU and non-union labor i.e. LC - LU)
D’D is the portion of total labor demand that has to be satisfied by non-union labor
D’
Additional wage bill due to union
To see how union monopoly power impacts the non-unionized part of the economy
Bilateral Monopoly: Market in which a Monopolist seller (MP) of labor sells to a
Monopsonist buyer (MS) of labor (typology 7)
Numberof Workers
Wageper
worker
DL = VMPL
MR
5
10
15
20
25
10 20 40
SL = AE
ME
25
19
WagePossibilities
wC
WMP=
WMS=
Implications of Bilateral Monopoly for Wages
• Monopolist seller of labor will try to set wage rate at WMP.
• Monopsonist buyer of labor will try to set wage rate at WMS.
• Depending upon the relative bargaining power of the buyer and seller of labor, the wage rate will lie between these two extremes.
Bilateral Monopoly: Market in which a Monopolist Factor Supplier sells to a
Monopsonist cum Monopolist (typology 8)
Numberof Workers
Wageper
worker
DL = VMPL
DL’=MRPL
5
10
15
20
25
10 20 40
SL = AE
ME
25
19
WagePossibilities
wC
WMP=
WMS=
MR’L
W’MP
W’MS
W’MP< WMP
L’MP< LMP
W’MS< WMS
L’MS< LMS
L’MP L’MS
LMP
LMS
Who will win under Bilateral Monopoly?
• The union will win if its threat to strike is credible.
• The firm will win if its threat to hire non-union workers is credible.
• If both make credible threats, the wage will be at Wc.
The Decline of Private Sector Unionism in USA
• Observations– Union membership and monopoly power has
been declining.– Initially, during the 1970’s, union wages relative
to non-union wages fell.– In the 1980’s union wages stabilized relative to
non-union wages.– In the 1990’s membership has been falling and
wage differential has remained stable.• Explanations
– The unions have been attempting to maximize the individual wage rate instead of total wages paid.
– The demand for unionized employees has probably become increasingly elastic as firms find it easier to substitute capital for skilled labor.