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