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14.E: Issues in Labor Markets- Unions, Discrimination, Immigration (Exercises)

  • Page ID
    4145
  • Key Concepts

    14.1 The Theory of Labor Markets

    A firm demands labor because of the value of the labor’s marginal productivity. For a firm operating in a perfectly competitive output market, this will be the value of the marginal product, which we define as the marginal product of labor multiplied by the firm’s output price. For a firm which is not perfectly competitive, the appropriate concept is the marginal revenue product, which we define as the marginal product of labor multiplied by the firm’s marginal revenue. Profit maximizing firms employ labor up to the point where the market wage is equal to the firm’s demand for labor. In a competitive labor market, we determine market wage through the interaction between the market supply and market demand for labor.

    14.2 Wages and Employment in an Imperfectly Competitive Labor Market

    A monopsony is the sole employer in a labor market. The monopsony can pay any wage it chooses, subject to the market supply of labor. This means that if the monopsony offers too low a wage, they may not find enough workers willing to work for them. Since to obtain more workers, they must offer a higher wage, the marginal cost of additional labor is greater than the wage. To maximize profits, a monopsonist will hire workers up to the point where the marginal cost of labor equals their labor demand. This results in a lower level of employment than a competitive labor market would provide, but also a lower equilibrium wage.

    14.3 Market Power on the Supply Side of Labor Markets: Unions

    A labor union is an organization of workers that negotiates as a group with employers over compensation and work conditions. Union workers in the United States are paid more on average than other workers with comparable education and experience. Thus, either union workers must be more productive to match this higher pay or the higher pay will lead employers to find ways of hiring fewer union workers than they otherwise would. American union membership has been falling for decades. Some possible reasons include the shift of jobs to service industries; greater competition from globalization; the passage of worker-friendly legislation; and U.S. laws that are less favorable to organizing unions.

    14.4 Bilateral Monopoly

    A bilateral monopoly is a labor market with a union on the supply side and a monopsony on the demand side. Since both sides have monopoly power, the equilibrium level of employment will be lower than that for a competitive labor market, but the equilibrium wage could be higher or lower depending on which side negotiates better. The union favors a higher wage, while the monopsony favors a lower wage, but the outcome is indeterminate in the model.

    14.5 Employment Discrimination

    Discrimination occurs in a labor market when employers pay workers with the same economic characteristics, such as education,experience, and skill, are paid different amounts because of race, gender, religion, age, or disability status. In the United States, female workers on average earn less than male workers, and Black workers on average earn less than White workers. There is controversy over to which discrimination differences in factors like education and job experience can explain these earnings gaps. Free markets can allow discrimination to occur, but the threat of a loss of sales or a loss of productive workers can also create incentives for a firm not to discriminate. A range of public policies can be used to reduce earnings gaps between men and women or between White and other racial/ethnic groups: requiring equal pay for equal work, and attaining more equal educational outcomes.

    14.6 Immigration

    The recent level of U.S. immigration is at a historically high level if we measure it in absolute numbers, but not if we measure it as a share of population. The overall gains to the U.S. economy from immigration are real but relatively small. However, immigration also causes effects like slightly lower wages for low-skill workers and budget problems for certain state and local governments.

    Questions

    1. Table \(\PageIndex{1}\) shows levels of employment (Labor), the marginal product at each of those levels, and the price at which the firm can sell output in the perfectly competitive market where it operates.

    Labor Marginal Product of Labor Price of the Product
    1 10 $4
    2 8 $4
    3 7 $4
    4 5 $4
    5 3 $4
    6 1 $4

    Table \(\PageIndex{1}\)

    1. What is the value of the marginal product at each level of labor?
    2. If the firm operates in a perfectly competitive labor market where the going market wage is $12, what is the firm’s profit maximizing level of employment?
     
    2. Table \(\PageIndex{2}\) shows levels of employment (Labor), the marginal product at each of those levels, and a monopoly’s marginal revenue.
    Labor Marginal Product of Labor Price of the Product
    1 10 $10
    2 8 $7
    3 7 $5
    4 5 $4
    5 3 $2
    6 1 $1

    Table \(\PageIndex{2}\)

    1. What is the monopoly’s marginal revenue product at each level of employment?
    2. If the monopoly operates in a perfectly competitive labor market where the going market wage is $20, what is the firm’s profit maximizing level of employment?
     

    3. Table \(\PageIndex{3}\) shows the quantity demanded and supplied in the labor market for driving city buses in the town of Unionville, where all the bus drivers belong to a union.

    Wage Per Hour Quantity of Workers Demanded Quantity of Workers Supplied
    $14 12,000 6,000
    $16 10,000 7,000
    $18 8,000 8,000
    $20 6,000 9,000
    $22 4,000 10,000
    $24 2,000 11,000

    Table \(\PageIndex{3}\)

    1. What would the equilibrium wage and quantity be in this market if no union existed?
    2. Assume that the union has enough negotiating power to raise the wage to $4 per hour higher than it would otherwise be. Is there now excess demand or excess supply of labor?
     

    4. Do unions typically oppose new technology out of a fear that it will reduce the number of union jobs? Why or why not?

    5. Compared with the share of workers in most other high-income countries, is the share of U.S. workers whose wages are determined by union bargaining higher or lower? Why or why not?

    6. Are firms with a high percentage of union employees more likely to go bankrupt because of the higher wages that they pay? Why or why not?

    7. Do countries with a higher percentage of unionized workers usually have less growth in productivity because of strikes and other disruptions caused by the unions? Why or why not?

    8. Table \(\PageIndex{4}\) shows information from the supply curve for labor for a monopsonist, that is, the wage rate required at each level of employment.
    Labor Wage
    1 1
    2 3
    3 5
    4 7
    5 8
    6 10

    Table \(\PageIndex{4}\)

    What is the monopsonist’s marginal cost of labor at each level of employment?

    1. If each unit of labor’s marginal revenue product is $13, what is the firm’s profit maximizing level of employment and wage?
     

    9. Explain in each of the following situations how market forces might give a business an incentive to act in a less discriminatory fashion.

    1. A local flower delivery business run by a bigoted White owner notices that many of its local customers are Black.
    2. An assembly line has traditionally only hired men, but it is having a hard time hiring sufficiently qualified workers.
    3. A biased owner of a firm that provides home health care services would like to pay lower wages to Hispanic workers than to other employees.
     

    10. Does the earnings gap between the average wages of females and the average wages of males prove labor market discrimination? Why or why not?

     
    11. If immigration is reduced, what is the impact on the wage for low-skilled labor? Explain.

    12. What determines the demand for labor for a firm operating in a perfectly competitive output market?

    13. What determines the demand for labor for a firm with market power in the output market?

    14. What is a perfectly competitive labor market?

    15. What is a labor union?

    16. Why do employers have a natural advantage in bargaining with employees?

    17. What are some of the most important laws that protect employee rights?

    18. How does the presence of a labor union change negotiations between employers and workers?

    19. What is the long-term trend in American union membership?

    20. Would you expect the presence of labor unions to lead to higher or lower pay for worker-members? Would you expect a higher or lower quantity of workers hired by those employers? Explain briefly.

    21. What are the main causes for the recent trends in union membership rates in the United States? Why are union rates lower in the United States than in many other developed countries?

    22. What is a monopsony?

    23. What is the marginal cost of labor?

    24. How does monopsony affect the equilibrium wage and employment levels?

    25. What is a bilateral monopoly?

    26. How does a bilateral monopoly affect the equilibrium wage and employment levels compared to a perfectly competitive labor market?

    27. Describe how the earnings gap between men and women has evolved in recent decades.

    28. Describe how the earnings gap between Blacks and Whites has evolved in recent decades.

    29. Does a gap between the average earnings of men and women, or between Whites and Blacks, prove that employers are discriminating in the labor market? Explain briefly.

    30. Will a free market tend to encourage or discourage discrimination? Explain briefly.

    31. What policies, when used together with antidiscrimination laws, might help to reduce the earnings gap between men and women or between White and Black workers?

    32. Describe how affirmative action is applied in the labor market.

    33. What factors can explain the relatively small effect of low-skilled immigration on the wages of low-skilled workers?
     
    34. Have levels of immigration to the United States been relatively high or low in recent years? Explain.

    35. How would you expect immigration by primarily low-skill workers to affect American low-skilled workers?

    36. What is the marginal cost of labor for a firm that operates in a competitive labor market? How does this compare with the MCL for a monopsony?

    37. Given the decline in union membership over the past 50 years, what does the theory of bilateral monopoly suggest will have happened to the equilibrium level of wages over time? Why?

    38. Are unions and technological improvements complementary? Why or why not?

    39. Will union membership continue to decline? Why or why not?

    40. If it is not profitable to discriminate, why does discrimination persist?

    41. If a company has discriminated against minorities in the past, should it be required to give priority to minority applicants today? Why or why not?

    42. If the United States allows a greater quantity of highly skilled workers, what will be the impact on the average wages of highly skilled employees?

    43. If all countries eliminated all barriers to immigration, would global economic growth increase? Why or why not?

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