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EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with...

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EA Session 21: EA Session 21: August 24, 2007 August 24, 2007
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Page 1: EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized &

EA Session 21: EA Session 21: August 24, 2007August 24, 2007

Page 2: EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized &

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

Page 3: EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized &

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

Page 4: EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized &

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

Page 5: EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized &

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

Page 6: EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized &

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

Page 7: EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized &

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

Page 8: EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized &

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’

Page 9: EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized &

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)

Page 10: EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized &

• A Two-Sector Model of Labor Employment– Union monopoly power impacts the

non-unionized part of the economy.

Factor Markets with Monopoly Power

Page 11: EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized &

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

Page 12: EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized &

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=

Page 13: EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized &

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.

Page 14: EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized &

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

Page 15: EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized &

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.

Page 16: EA Session 21: August 24, 2007. Overview Factor Markets with Monopsony Power Factor Markets with Monopoly Power Wage discrimination across unionized &

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.


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