L23 imperfect labour

Principles of Microeconomics

Topic 6: Imperfect Labour Markets

• Presented by: Luke Garrod

Aims of this Lecture

• Understand Imperfect Labour Markets where:

  • Employees and/or employers can be wage makers.

  • Wage Making Employers:

    • Few large relative to the market; e.g. monopsonists.

  • Wage Making Employees:

    • Unique talent or unionization leading to collective bargaining.

• Objective: Investigate units of labour employed and the wage level in imperfect labour markets.

Lecture Outline

1. Monopsony (with wage-taking sellers)

2. Union Monopoly (with wage-taking buyers)

3. Bilateral Monopoly (both wage makers)

• Reading Material:

  • Core: Lipsey & Chrystal, Chapters 9 & 10

  • Extra: Perloff, Chapter 15

Monopsony Assumptions

• Maintain assumptions from perfect labour markets:

  1. Firm operates in a perfectly competitive output market.

  2. Firm and workers have complete information.

  3. Workers are wage takers.

  4. Free entry for workers.

• Change in Assumption: The firm is a wage maker in the labour market.

  • To employ more units of labour, the wage rate must increase; the labour supply curve slopes upwards.

Appropriate Market Structure

• Assumptions imply:

  • Many workers are equally productive; buyers and sellers are fully informed.

• Size & Number of Sellers (Workers):

  • Many small (workers).

  • One large (firm).

• A small change in worker supply has little effect on wage due to its size relative to total.

• Size & Number of Buyers (Firms):

  • Many small (firms).

  • One large (buyer).

• A large change by the buyer significantly affects market conditions.

Equilibrium under Monopsony

• Equilibrium determined by the Marginal Input Rule:

  • The monopsonist's supply curve aligns with the market's supply curve (upwards sloping).

  • Total Cost of Labour (TCL) is given by:TCL = wL

  • Marginal Cost of Labour (MCL) is higher than Average Cost of Labour (ACL) due to:

    • Increases in wage for all employed units when one more unit is hired.

Discriminating Monopsony

• A monopsonist may pay different wages based on workers' willingness to accept (WTA).

• Extreme Case:

  • Knowledge of each worker's WTA allows individual contracts.

• Impact on MCL:

  • Employing another unit raises wage only for that unit, hence MCL equals ACL for the extra unit.

Monopoly Union Assumptions

• Maintain previous assumptions plus:

  • Workers act as wage makers through union representation.

• Assumption of minimum wage set by the union affects market dynamics.

Appropriate Market Structure for Unionization

• Assumptions imply many undifferentiated workers acting collectively due to union coordination.

• Market entry and actions heavily influenced by union power.

Monopoly Union Dynamics

• Upside: Unions benefit members by increasing wages.

• Downside: Higher wages can reduce total employment, particularly in wage-taking environments.

• Effects on Firms: Increased costs may lead to industry exit, reducing employment and raising output prices.

Summary of Monopoly Union Dynamics

• Wage determined by the intersection of supply and demand.

• Employment decreases due to minimum wage enforcement by unions, creating unemployment among potential hires.

Bilateral Monopoly Assumptions

• Maintain previous assumptions, modifying:

  • Both firm and workers as wage makers influencing the wage level.

Bilateral Monopoly Dynamics

• No unique equilibrium wage; wage defined through bargaining power.

• Employment can be stable despite minimum wage if well-managed.

Summary of Key Concepts

• When employers are wage makers and workers are wage takers:

  • The market has one employer competing for many equally productive workers.

• Short-run Impact: Wage does not reflect productivity (w < MRPL).

• Unions can shift workers to wage makers, affecting overall wages and employment trends.

Expected Learning Outcomes

• Understand assumptions and structure of monopsony, monopoly union, and bilateral monopoly.

• Derive monopsony conditions diagrammatically.

• Differentiate between monopsony, monopoly union, and bilateral monopoly, including their effects on employment and wages.