1week7 labor 2008

MGT. M259C: Analysis of Labor Markets --PP CM230 Labor Markets and Public Policy Daniel J.B. Mitchell Ho-su Wu Professor Anderson School and School of Public Affairs

Reminder

The (Good) Writing Guidelines

Spellcheck Headings, etc.

Page numbers Rule of 3 for sentences and paragraphs Proper use of introduction and conclusion

Other Remaining Issues Subsidized training to reduce structural unemployment  Effectiveness of educational institutions and students in responding to changing labor market conditions  Literature on effectiveness of education policies, e.g., 

Curriculum reforms Class size reductions Testing Voucher systems

“I’m taking my voucher and going to circus school.”

Stylized Facts About the Union Sector

Stylized Facts About the Union Sector  Level

of pay  Trend in pay  Composition of pay  Use of seniority  Contract duration  Method of settling rights disputes  Method of settling interest disputes  Representation trends  Unions and politics

Ratio: Union Wage to Average Wage: 12/90=100 104 102 100 98 96 94

Was there a downside for unions in pulling up the union wage ratio in the 1970s?

2007

2004

2001

1998

1995

1992

1989

1986

1983

1980

1977

1974

1971

1968

1965

1962

1959

1956

92

Median First-Year Union Wage Settlements (right axis) and Percent Concessions (left axis) 40

12

35

Wage Freeze or Cut

30

First-Year Settlement

10 8

25 20

6

15

4

10 2

5

Source: BNA

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

0 1979

0

Number of Union-Represented Workers (000s) 25000 Govt.

22500

Private

20000 17500 15000 12500 10000 7500 5000 2500

CPS Data from www.unionstats.com

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

0

Union Representation Rates for Wage and Salary Workers (Percent) 50.0 45.0 40.0

Total

35.0

Private

30.0

Govt.

25.0 20.0 15.0 10.0 5.0

CPS Data from www.unionstats.com

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

0.0

Change in Total Union Representation: 1980-2002

Explained 28%

Unexplained 72%

Change in Private Union Representation: 1980-2002

Explained 25%

Unexplained 75%

Models of Union Pay Determination  Early

maximizing models  Later wage-employment trade off models  Efficiency considerations  Political vs. economic models  Bargaining models

Unions and the Demand for Labor: What is the goal?

Maximize the wage?

Wage

Demand = MRPL 0

Labor

Unions and the Demand for Labor: What is the goal?

Maximize the wage?

Wage

Demand = MRPL 0

Labor

Unions and the Demand for Labor: What is the goal?

Maximize employment?

Wage

Demand = MRPL 0

Labor

Note implicit assumption: Union “chooses� wage and firm then chooses employment level.

Unions and the Demand for Labor: What is the goal?

Maximize the wage bill?

Wage

Demand = MRPL 0

Labor

Unions and the Demand for Labor: What is the goal?

Maximize the wage bill?

Wage

Wage bill = WL is maximized where elasticity of demand = 1

|e| = 1 Demand = MRPL 0

Labor

Unions and the Demand for Labor Maximize a utility function containing W and L? Wage

Demand = MRPL 0

Labor

Reminder: Marshall-Hicks conditions for a low elasticity (at a point on a labor demand curve) Demand for final product is relatively inelastic Other factors cannot be easily substituted for type of labor Supply of other factors is inelastic (so buying more of them significantly raises their prices) (Generally) when the cost of this type of labor is a small percent of total costs

Monopoly

Seller Power

Monopoly

Byproduct is “shortage” of customers because price is “too” high

Monopoly

Byproduct is “shortage” of customers because price is “too” high

Monopsony is the mirror image of monopoly

Buyer Power Rather than Seller Power (Employer is buyer in labor market.)

Monopsony (in the labor market)

Company store

Company town

Standard example

Monopsony (in the labor market)

Byproduct: “Shortage” of employees because wage is “too” low

Monopsony Exception A “captive” labor market: Is S = D the right rule for profit maximization?

W

S

David Card

W1

D 0

L1

Minimum wage study of Card & Krueger noted that any labor market has “captive” properties.

L Alan Krueger

Monopsony Exception With captive labor market, there is a rising marginal cost of labor > S W

MCL

S

W1

D 0

L1

L

Monopsony Exception So correct rule is to set D = MCL and set wage along S at W2 W

MCL

S

W1 W2 D 0

L1

L

Monopsony Exception Note that this creates a permanent “labor shortage� since if an additional worker entered the market, the employer would happily hire him/her at the going wage W2.

W

MCL

S

W1 W2 D 0

L1

L

Monopsony Exception Suppose a union set the wage above W2. What would the consequence be of going to W1 or W3?

W

MCL

S

W3 W1 W2 D 0

L1

L

Absent monopsony exception, union faces wage-employment trade off. But why should it “accept” employer determination of L?

Efficient Bargaining Problem: Why not bargain Wage over W and L? Result if union sets W and firm sets L

Demand 0

Labor

Efficient Bargaining Problem: Why not bargain Wage over W and L? Firm’s iso-profit line

Demand 0

Labor

Efficient Bargaining Problem: Why not bargain Wage over W and L? Union gets a better deal and firm is indifferent

Demand 0

Labor

An Alternative Collective Bargaining Approach Drop unilateral wage (or wage-and-employment) determination role of union  Recognize explicit management role  Recognize “perception” problem inherent in bargaining  Consider the possibility of satisficing rather than Herbert Simon optimizing 

RenĂŠe Montaigne

Ross and Dunlop Is union “economic” or “political”?  If latter, will membership “perceive” wage-employment trade off given dominance of other employmentdetermining influences?  Given long-term relationship, could union proceed without explicit consideration of trade off?  What might be long-term consequences of such a bargaining strategy? 

Wage

What’s Under the Demand Curve for Labor?

0

If demand curve is marginal revenue product of labor curve, total revenue (sum of marginal revenue) is area under the demand curve.

Shaded area = revenue attributable to hiring L1 labor.

L1

Labor

Wage

What’s Under the Demand Curve for Labor?

Since the cost of labor is W1L1 (the lower box), the upper triangle represents revenue - labor cost = profit + nonlabor costs.

Profit + nonlabor costs Total labor cost

W1

0

L1

Labor

Wage

What’s Under the Demand Curve for Labor?

Raising wage from W1 to W2 will cut into profit. Union will meet stronger resistance the more it tries to raise the wage.

Profit + nonlabor costs

W2

Total labor cost

W1

0

L1

Labor

Wage

What’s Under the Demand Curve for Labor?

Thus, union can count on management resistance to (partially) protect it from going “too far” up the curve, even if union doesn’t explicitly recognize the trade off.

W2 W1

0

L1

Labor

Problems with Union Dependence on Management Resistance W If there are substitution opportunities, management resistance to wage demands may not be strong.  Substitution possibilities are likely to grow over time.  Demand curve may become more elastic in long run as nonunion competitors enter product market.  Large short-run potential strike costs may obscure long-term consequences. 

 The

Hicks (duration) model  Strikes as “mistakes”  Asymmetric information  Short-term vs. long-term strike cost minimization

Number of Major Work Stoppages Beginning in Year

“Major� = involving 1000 or more workers

The Hicks Model Determining Strike Duration

Wage positions

WU

WM

t*

Time