Imperfectly Competitive Markets for Factors of Production

"We are born in a Pullman house, fed from the Pullman shops, taught in the Pullman school, catechized in the Pullman

Church, and when we die we shall go to the Pullman Hell.“

-An employee of the Pullman Car Company on strike.Slide 1 of 28

A review of perfect competition

Recall in our last module, we discussed perfectly competitive labor markets.

In those markets, employers used MRP and MFC to determine how many

employees they’d hire

And these employers and employees were price takers. In our example in that

module, they could hire as many employees as they wanted at $6 per hour.

In this module, we’ review this idea of a perfectly competitive labor market and

compare it to an imperfectly competitive labor market.

Slide 2 of 28

The characteristics of a perfectly competitive labor market

Characteristics of a perfectly competitive labor market

Many firms compete with one another for labor. None hire enough to influence the

wage rate.

There are numerous workers with nearly identical skills.

Individual firms and workers are both “wage takers”. Neither can dictate the

wage. A cashier may be a good example!

Slide 3 of 28

The labor market for cashiers

The demand for labor will be the sum of the individual firms’ labor

demand curves within that market.

The supply for labor will be based on that market’s labor force.

Wal-Mart may demand a lot of cashiers at a given wage rate while a Mom & Pop hardware store may

need only one cashier.

As wages increase, workers are more willing to work!

Slide 4 of 28

The market (if left alone) will reach equilibrium

If wages start here ($10), supply will exceed demand. Some people will

leave the labor force.

If wages start here ($4), demand will exceed supply.

Employers will bid up prices to attract help.

Eventually an industry wide equilibrium will

be found (in that market).

Slide 5 of 28

Labor supply and demand in a purely competitive market and within a firm

Labor Market for Cashiers Individual Firm

First, wages are set by the labor market

Note that each employer hires too

few workers to influence the wage

rate.

That than becomes the wage rate for perfectly competitive firms and

workers, as they are both price takers

Slide 6 of 28

MFC (=S)

But what if a labor market was not perfectly competitive?

An example of a monopsonist might be a factory at the center of

a “Company Town”

Characteristics of an imperfectly competitive labor market

There is only one employer of a particular type of labor.

That labor is relatively immobile. It is had for employees to “leave town” in

search of better work.

The firm is a “price setter” or “wage maker”.

When there is only one buyer of a good or service, it is called a

“Monopsonist”

They are the only buyer of labor in that town.

Slide 7 of 28

A monopsony in comparison to a perfectly competitive labor market

Examples of Perfectly Competitive Labor Markets

• Retail• Restaurant services• Car wash services

Examples of Imperfectly Competitive Labor Markets• Silver mines• Textile mills• End of the railroad

If you seek work in these industries, there are many

employers and the wages are set by the market.

If you seek work in these industries, there may be only one employer and they are

wage makers.

Slide 8 of 28

Monopsonists do have an impact on wages-they are wage makers

Think of it this way: as an employer in a company town wants to hire more people,

they have to lure them there with higher wages.

Recall:

That means the monopsonist’s MFC curve is not perfectly

elastic. It is upward sloped!

Note the increasing wages. A monopsonist is a wage maker. As they hire more people, they

drive the wage up.

Slide 9 of 28

The monopsonist’s hiring decision

Much like perfectly competitive labor markets, a monopsonist uses the MRP=MFC rule when

making the hiring decision.

For this monopsonist, the first employee’s MRP>MRC. They

are a good hire!

For this monopsonist, the 2nd employee’s MRP>MRC. They

are a good hire!

For this monopsonist, the 3rd employee’s MRP=MFC. That

is the last attractive hire!

Slide 10 of 28

This shows another example of a firm making a decision

based on marginal costs and marginal benefits!

The monopsonist’s wage decision

For three workers, enough labor will be

provided at $8. That is the least the Monopsonist can pay! Again, we see market power that leads

to exploitation.

For this monopsonist, we have determined that they will hire

three employees.

But what will they pay them?

In a perfectly competitive labor market, the wage is set by the market and both employer and

employee is a wage taker.

But much like a monopolist, this

monopsonist has market power and

can exploit the market- they can pay low wages.

Slide 11 of 28

Let’s take a closer look at this…

The monopsonist has determine the he or she will hire three people.

Imagine you are a worker and you are employed for

this monopsonist.

Three people are willing to

supply labor at $8 per

hour.

But their contribution…what they are worth…their MRP…

is $12 an hour!

You are being exploited. As the only buyer of your

labor the monopsonist has market power.

Don’t forget – there is only one employer, and labor is immobile. You

are stuck with few options.

Slide 12 of 28

Some historic monopsonist examples are extreme

• In 1854, Sharpe, Leisenring and Company (S. L. & Co.) seeks to exploit anthracite coal from rural Pennsylvania

• To house the workers, S.L. & Co built Eckley, PA

• Eckley was one of many “Patchtowns” that popped up in order to extract coal. In those towns, they were the only employer.

• By 1870’s Eckley had 1,500 residents

• S. L. & Co built the stores and other buildings, and of course controlled them all

• Since there was only one employer, workers were at the mercy of the mine owner for pay and for the provision of food and tools

• The monopsonist had the market power!

EckleyEst. 1854

Slide 13 of 28

Getting them on both ends

Monopsonist

(Textile Mill owner)

Labor

Wages

Mill Workers

Company Store

Costs for toolsTools

Profit

Ren

t

Proceeds from rent

In the end, the monopsonist got it all.

Company HousingHotel, Doctor’s office,

Saloon

SpendingProfit

Slide 14 of 28

A worker’s viewpoint of conditions in a town like Eckly

Sixteen TonsSang by Merle Travis (1946)

Some people say a man is made outta mud A poor man's made outta muscle and blood

Muscle and blood and skin and bones A mind that's a-weak and a back that's strong

You load sixteen tons, what do you get? Another day older and deeper in debt

Saint Peter don't you call me 'cause I can't go I owe my soul to the company store

In some cases, those employed by a monopsonist had a tough

life.

Take a look at the words to this song, which might summarize

living conditions.

Slide 15 of 28

Others monopsonists weren’t strictly profit oriented

• George Pullman found Pullman, Ill in 1880

• It was a company town complete with stores, churches, schools, and hotels

• Houses were nice (for the day) and people fought for jobs at the Pullman Palace Car Company

• In a social engineering experiment, he allowed no liquor sales, no prostitutes, and only churches of certain religions

• As a recession weakened the economy, wages were cut and employee moral fell

• It ended with riots and bloodshed.

George Pullman

Pullman Palace Car

Slide 16 of 28

Modern monopsonies

• Fortunately, monopsonies are not common today, but they do still exist

If you want to work in a specific geographic area or a specific

industry, you may find there is only one buyer

of your labor.

For example, if you want to work in a

space program, NASA may be your only

chance.

Can you think of any?

Slide 17 of 28

Simply put, laborers had no market power

• A sample of work conditions in 1880: – work ten to twelve hours straight

six days a week with a half a day off on Sunday

– Workers toiled amid deafening noise, choking coal dust or lint, and overwhelming heat and humidity and lots of danger

– Life expectancy for some miners was as low as 13 months

– Employers paid low wages and would hire children to “help families make ends meet.”

– Children entered full time labor at age 12

These might have been employees

Slide 18 of 28

Workers tired of these conditions

Molly Maguire’s

• In some cases they resorted to violence.

• Oppressed workers began to organize and fight back.

• In one example, a group of Irish miners called the Molly Maguire's threatened bosses for safer jobs and killed middle management or owners in an attempt to wield power

But with no market power, what could they do?

Slide 19 of 28

But how?

Eventually workers sought to grab market power

Unions are a good tool to combat a monopsonist’s power

Today’s unions are still powerful although there numbers have been in decline

Slide 20 of 28

How do unions achieve their goals?

Unions typically use one of three strategies

Increasing Demand - such as a buy American

Campaign

Inclusivity - such as AFL - CIO

More on these in the next few slides…

Exclusivity - such as the American Bar Association

Slide 21 of 28

In the best case, unions increase demand for their services

• Unions can increase product demand through a “Buy Union Campaign”

• Unions can lobby political leaders for government contracts

• Unions can lobby employers for additional equipment thereby making them more productive

• Unions can influence prices of other products (through tariffs and minimum wage).

If unions cause demand to go up, the wages and quantity of

labor increase. That is the perfect scenario.

Slide 22 of 28

Exclusivity – Keeping people out

• Restrict employment through lobbying (for example, policy change could reduce immigration or make child labor illegal.)

• Require certifications to practice thereby limiting supply of labor (also protects consumers)

• Require long apprenticeships to discourage new competition

• Examples include the AMA (American Medical Association) or the American Bar Association

Here, the union has increased wages. Unfortunately, they

have also reduced the number of workers.

Slide 23 of 28

Inclusivity – adding lots of members

Ordinarily, a worker in this field would

be paid at this level

Qd’ Qd

S’

In effect, they are “bending” the supply curve.

Unfortunately, this strategy also results in a restriction

of employmentBut if virtually all labor in a field can be organized, then they can demand

higher wages.

Slide 24 of 28

To work, inclusive unions need to get big

Examples include:

AFL-CIO (American Federation of Labor and Congress of Industrial Organizations): 10 million members

NEA (National Education Association): 3 million members

TIAA CREF (Teachers Insurance and Annuity Association - College Retirement Equities Fund): 3 million members

S’

And this strategy only works if you involve all the workers. Therefore,

these unions have to be BIG.

Slide 25 of 28

What happens when inclusivity meets monopsony?

Unions will press for this wage ($12/hr)

The monopsonist(s) will press for this wage ($8/hr).

The wage will likely be between and will be based on bargaining, power, and strategy.

Notice how the two market forces cancel each other out and the wage winds up near the

perfectly competitive level.

Each has control. One force

controls labor supplied. One controls labor

demanded. This is called a bilateral

monopoly.

Slide 26 of 28

In Summary

Monopsonists still make the hiring decision by analyzing MRP and MFC.

However, they are the lone buyer of that labor – the Labor maker is imperfectly

competitive.

As a result, they are price setters- they select the wage as opposed to taking the

market wage.

That allows them to exploit workers…especially if that labor is immobile.

Slide 27 of 28

Credits

Slide 1:https://commons.wikimedia.org/wiki/File:Pullman_car_exterior.jpgSlide 4: http://www.flickr.com/photos/bioversity/8554603872/Slide 7: https://commons.wikimedia.org/wiki/File:Friedrich_Witte_Fabrik.jpgSlide 14: http://commons.wikimedia.org/wiki/File:Former_textile_mill,_now_converted_for_residential_use_-_geograph.org.uk_-_450032.jpg, http://www.flickr.com/photos/documentingtrees/199211935/’Slide 16: https://commons.wikimedia.org/wiki/File:Gpullman.jpg, https://commons.wikimedia.org/wiki/File:Pullman_car_exterior.jpgSlide 17: http://www.flickr.com/photos/fragilebreath/33416329/, http://commons.wikimedia.org/wiki/File:Nasa-logo.gif, http://commons.wikimedia.org/wiki/File:It_is_the_logo_of_Pawar_Public_School.pngSlide 18: http://www.flickr.com/photos/53035820@N02/5179960789/Slide 19: https://commons.wikimedia.org/wiki/File:New_York_Draft_Riots_-_fighting.jpg

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