CHAPTER 12
LABOR MARKETS AND LABOR UNIONS
In this chapter, you will find:
Learning Outcomes
Chapter Outline with PowerPoint Script
Chapter Summary
Teaching Points (as on Prep Card)
Solutions to Problems Appendix
Experiential Assignments
INTRODUCTION
The first part of this chapter consists of a careful discussion of the individual labor supply curve with
emphasis on the income and substitution effects of a higher wage rate. Factors that influence labor supply
LEARNING OUTCOMES
12-1 Explain why the quantity of labor supplied increases with the wage, other things constant.
People allocate their time to maximize utility. There are three uses of time: market work, nonmarket
work, and leisure. A person attempts to maximize utility by allocating time so that the expected mar-
12-2 Describe why some workers earn higher wages than other workers.
The intersection of labor demand and labor supply curves determines the market wage and market
12-3 Summarize the objectives of labor unions and outline strategies used to achieve these objectives.
Unions can broadly be classified as either craft unions (people with a particular skill, or craft) or in-
12-4 Give reasons why unionization rates have declined in recent decades.
Inclusive, or industrial, unions attempt to establish a wage floor that exceeds the competitive, or
Chapter 12 Labor Markets and Labor Unions 174
market-clearing, wage. A union wage above the market-clearing level creates an excess quantity
of labor supplied, so the union must somehow ration the limited jobs among its members. Exclusive,
or craft, unions try to raise union wages by restricting the supply of labor. Another way to raise union
CHAPTER OUTLINE WITH POWERPOINT SCRIPT
USE POWERPOINT SLIDES 2-6 FOR THE FOLLOWING SECTION
Labor Supply and Utility Maximization: Two sources of utility are the consumption of goods and
services and the enjoyment of leisure.
Three Uses of Time: Market work is time sold in the labor market in return for a wage; nonmarket work is
time spent producing your own goods and services, and includes time spent acquiring an education;
leisure is time spent on nonwork activities.
Work and Utility: Work is subject to increasing marginal disutility (the more a person works, the greater
USE POWERPOINT SLIDES 7-9 FOR THE FOLLOWING SECTION
Wages and Individual Labor Supply: This section develops a model for labor supply during the
summer, a beneficial reference for discussion of the substitution and income effect.
Substitution and Income Effects: The substitution effect of a wage increase causes workers to substitute
USE POWERPOINT SLIDES 10-12 FOR THE FOLLOWING SECTION
Nonwage Determinants of Labor Supply
• Other Sources of Income: An individual’s willingness and ability to supply labor depends on other
sources of income, such as family, savings, student loans, and scholarships.
USE POWERPOINT SLIDES 13-15 FOR THE FOLLOWING SECTION
Chapter 25 Labor Markets and Labor Unions 175
Why Wages Differ
• Differences in Training, Education, Age, and Experience: Some jobs pay more because they
require more costly training, education, and experience, which also affect labor supply; age is often
USE POWERPOINT SLIDE 16 FOR THE FOLLOWING SECTION
Unions and Collective Bargaining
Union: A labor union is a group of workers who join together to improve terms of employment.
USE POWERPOINT SLIDES 17-18 FOR THE FOLLOWING SECTION
Collective Bargaining: The process by which representatives of union and management negotiate a mu-
tually agreeable labor contract
Mediation and Arbitration: A mediator is an impartial observer who listens to differences between
USE POWERPOINT SLIDES 19-27 FOR THE FOLLOWING SECTION
Union Wages and Employment
Inclusive, or Industrial, Unions: Union attempts to negotiate industry-wide wages for each class of
labor; the wage rate is higher and employment is lower than without the union.
Exclusive, or Craft, Unions: Usually limit the supply of union labor, resulting in an increase in wages
USE POWERPOINT SLIDES 28-30 FOR THE FOLLOWING SECTION
Recent Trends in Union Membership: Rates have declined steadily, as has strike activity.
Right-to-Work: Says that workers in unionized companies cannot be forced to join a union or pay union
dues. There has been an increase in the number of states that have adopted this law.
Chapter 12 Labor Markets and Labor Unions 176
CHAPTER SUMMARY
The demand for labor curve shows the relationship between the wage and the quantity of labor that
producers are willing and able to hire, other things constant. The supply of labor curve shows the
relationship between the wage and the quantity of labor that workers are willing and able to supply, other
things constant. The interaction of the labor demand and labor supply curves determines the market wage
and market employment.
The supply of labor depends on factors other than the wage, including (a) other sources of income, (b) job
amenities, (c) the value of job experience, and (d) worker tastes.
Inclusive, or industrial, unions attempt to establish a wage floor that exceeds the competitive, or market-
clearing wage. A union wage above the market-clearing level creates an excess quantity of labor supplied,
so the union must somehow ration the limited jobs among its members.
Exclusive, or craft, unions try to raise union wages by restricting the supply of labor. Another way to raise
union wages is to increase the demand for union labor.
TEACHING POINTS
1. The first part of this chapter deals with the important problem of time allocation. Time can be allo-
cated to three distinct uses: market work, nonmarket work, and leisure. These are some examples of
2. the interplay of the substitution and income effects of a wage change may be difficult for some stu-
dents to grasp at first. Most will have a reasonably intuitive feel for the substitution effect, but
Chapter 25 Labor Markets and Labor Unions 177
3. There may be a tendency for students to believe that fair and nondiscriminatory wages should de-
pend strictly on an individual’s training, ability, and experience. It is therefore important to
4. An important section of this chapter deals with the ways in which a union can increase employment
for its members. Many of them are subtle and will be of interest to your students. For example,
SOLUTIONS TO PROBLEMS APPENDIX
1. (Market Supply of Labor) The following table shows the number of hours per week supplied to a
particular market by three individuals at various wage rates. Calculate the total hours per week
(QT) supplied to the market.
Hours per Week
Hourly Wage Q1 Q2 Q3 QT
$ 15 20 0 0 ____
$ 16 25 0 0 ____
$ 17 35 10 0 ____
$ 18 45 25 10 ____
$ 19 42 40 30 ____
$ 20 38 37 45 ____
Which individuals, if any, have backward-bending supply curves in the wage range shown?
Does the market supply curve bend backward in the wage range shown in the table?
Hours per Week
Hourly Wage Q1 Q2 Q3 QT
$ 15 20 0 0 20
Chapter 12 Labor Markets and Labor Unions 178
2. (Substitution and Income Effects) Suppose that the cost of living increases, thereby reducing the
purchasing power of your income. If your money wage doesn’t increase, you may work more
hours because of this cost-of-living increase. Is this response predominantly an income effect or
a substitution effect? Explain.
If you work more even though the net utility from work has declined because of the eroded value
3. (Nonwage Determinants of Labor Supply) Suppose that two jobs are exactly the same except
that one is performed in an air-conditioned workplace. How could you measure the value
workers attach to such a job amenity?
You would be especially interested in measuring the difference in the two wages. The job in the
4. (Why Wages Differ) Why might permanent wage differences occur between different markets
for labor or within the same labor market?
Jobs that require a long and/or costly training period pay a wage premium over jobs that
5. (Craft and Industrial Unions) Both industrial unions and craft unions attempt to raise their
members’ wages, but each goes about it differently. Explain the difference in approaches and
describe the impact these differences have on excess quantity of labor supplied.
An inclusive, or industrial, union attempts to establish a wage floor above the competitive
6. (Union Objectives) What other objectives besides higher wages do unions pursue?
7. (Union Strategies) What strategies do unions employ to achieve their wage objectives?
The 2 basic strategies are to either get everyone in the industry to join the union and then use
one voice with the threat of a strike to achieve their wage objectives (industrial union); or un-
Chapter 25 Labor Markets and Labor Unions 179
8. (Unionization Rates) What trends have worked against the union movement during the last half
century? What has happened to the effectiveness of strikes and why?
Union membership as a percentage of the labor force has been falling for half a century.
9. (Industrial Unions) Review the logic underlying the exhibit below. Then determine the effect,
on the industry and a typical firm, of an increase in the demand for industry output. Show your
conclusions on a graph. Does the magnitude of the increase in demand make a difference?
Graph panel (a) shows that the market wage would be W if there were no union. Equilibrium
employment would be E. Panel (b) shows that an individual firm faces a perfectly elastic labor
increases, the labor demand curve for the individual firm also increases.
Chapter 12 Labor Markets and Labor Unions 180
10. (The Strike) Why might firms in industries with high fixed costs be inclined to prevent strikes or
end strikes quickly?
During a successful strike, the firm cannot produce goods for sale. Therefore, the strike acts as
11. (Industrial Unions) Why are unions more effective at raising wages in oligopolistic industries
than in competitive industries?
Competitive firms cannot easily pass along higher union wages as higher product prices.
Experiential Assignments
1. Ask students to interview five classmates to determine the nature of their labor supply curves for a
summer job. Students should ask each of them how many hours of work he or she would be willing
to supply at wage rates of $10, $15, $20, $25, and $30 per hour. They should then plot the results on a
labor supply diagram. Do any of these individuals exhibit a backward-bending labor supply curve? Is
the market supply curve for these five individuals backward bending?