1. The elasticity of labor supply is an important determinant of a monopsonist's ability to exploit workers. Recalling what you learned about differences in the elasticity of labor supply across different groups, are there any groups of workers (for example older workers, females, younger workers) who are more likely to be exploited by a monopsonist employer?
Degree of explotation, the more elastoc the labor supply the lower the wage differences (more competitive the market is)
it is related with labor mobility
"women's labor supply to the firm is less elastic than men's" "evidence is presented that women are less motivated than men by money in choosing jobs so that the female labor market is likely to be more monopsonistic than the male."
Taking into account that the degree of exploitation depends largely on the elasticity of labor supply the more elastic the labor supply the lower wage differences and thus possibility of monopsonist employer exploitation compared to a competitive employer. Mostly middle aged men who are professional athletes are one of the groups of workers which due to the reverse clause use to be exploited by getting paid less than their MRP. Also in coal mining towns it is again man middle aged and older that would be more prone to exploitation by monopsonist employer, because it is mostly men who work as miners.
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2. Explain the difference between a discriminating and non-discriminating monopsony!
If a non-discriminating monopsonist wants to hire new workers, the positively sloped labor supply schedule indicates that he or she must raise the wage level to attract new workers, and in addition raise the wage to the already employed workers. If this is not the case, and higher wages are paid only to the newly employed workers then the monopsonist is discriminating.
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3. Use three different examples to show the relevance of the labor mobility in determining the extent to which monopsonies can exercise their power!
Labor mobility is an important determinant of the extent to which monopsonies can exercise their power. There are three examples of this. The first example is the inelastic labor supply. In this example the labor supply schedule is steeper (more towards being vertical) and this indicates that labor is not very mobile. In such a case difference between competitive wage (Wc) and the wage paid by the monopsonist (Wm) is very high; therefore, high degree of wage exploitation is present. The second example is the elastic labor supply. In this case the labor supply schedule is more towards being horizontal which indicates that labor is mobile (it can move from one point to another very easily). Elastic labor supply as a result lowers the difference of wages between Wc and Wm. The third example is the perfectly elastic labor supply which indicates a horizontal supply schedule. In this case the difference between Wc and Wm is zero, meaning that there is no difference between wages paid by monopsonistic and competitive employers.
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4. Explain the relevance of the demand elasticity for labor in determining the extent to which monopsonies can exercise their power!
The magnitude of the monopsony-competitive pay differential is related to the elasticity of the labor demand schedule. The lower the elasticity of demand (MRP schedule) the smaller will be the pay difference.
The explanation behind this is that workers possessing inelastic demand schedules are considered to be so important to their employers that wages don't play much of a role in determining how many workers will be hired.
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5. Is it possible for pure competitive firms to assume monopsony power! Try to elaborate using the notion of a dynamic monopsony!
Is it possible for pure competitive firms to assume monopsony power! Try to elaborate using the notion of a dynamic monopsony!
The fact that workers cannot constantly search for alternative employment means that all firms are monopsonists in the labor market. Dynamic monopsony is called dynamic because a firms monopsony power relies on the commitment of workers to the firm in a relationship that is expected to last over many time periods.
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6. Some US local governments require companies interested in public tenders to pay their workers a living wage! Discuss arguments in favor and against such practices!
In this case we can say that the government is imposing minimum wage requirement. Minimum wage may not only reduce or eliminate the degree of monopsonistic exploitation butt increase the level of employment too. This is controversy to t...he logic of higher wages and lower employment. The minimum wage is usually set above what a monopsonistic employer would pay. As such the profit maximizing employer would desire to hire labors that meet its demand, but due to constraints of labor supply they will end up hiring fewer workers than demanded, but more than they would hire without minimum wage requirement. However, the tendency of the employer to hire more as the wage rises holds true only over a limited range. If the minimum wage is higher than what a competitive employer pays, than the usual negative association between wage level and employment level holds. Another point is that because the monopsonistic employer demands more labor than it is available, usually the excess demand would push wages up, but this does not happen in monopsonistic market. So minimum wage can have a positive effect on employment. But there are some implications with this. One such implication is that there are differences between minimum wages across countries which makes a living wage different for workers in different places. Another factor that limits the impact of minimum wage is the extent to which the legislated wage keeps up with the rate of inflation. Moreover, a rise in the minimum wage raises the number of young people in full-time employment which drops them from education. If unemployment rises as a result of minimum wage requirements then the ones who benefit are those who remain in work, whereas those out of employment do not benefit. This also increases the income distribution.
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11*. Describe some factors that have contributed to a lower relevance of unions in the past decades!
1.Females; 2. industries such as construction manufacturing or mining have declined in unions: 3. Regional movements (away from those that had more unions, away from those that had unions instututions etc.
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12. List and explain potential goals followed by labor unions!
There are three models that explain the goals of labor unions. One such model is the rent maximization model (fig 12.3). In this model the union aims to negotiate a wage up to the demand schedule, which would ensure that workers would ...receive their marginal revenue product. In this case the union would be maximizing the rent which is the return over and above the supply prices or reservation wages of its members.
The next model is the maximization of the wage bill model. In this model the wage bill is defined as the total amount of wage payments going to employed union members. In this model the union aims to maximize the wage bill. The wage bill is maximized is the wage on the demand schedule above the point where marginal revenue is equal to zero.
The third model is the median voter model. In this model the union aim maximizing the wage that satisfies the median voter, considering the fact that wages above would benefit only senior workers (those less likely to be fired), whereas wages below would benefit only non-senior workers. Despite wage the union goals include also the so called featherbedding where the union aims on certain work practices such as the limited amount of work or output. Some unions aim at improving work conditions and raising nonwage benefits as well, such as vacation, health insurance, holiday etc.
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13. One possible goal that unions follow is to maximize the wage bill! Explain the model and its shortcomings!
According to this model, unions try to maximize the total amount of wage payments going to employed union members. Even though this sounds very plausible, this model has some shortcomings. Union members are not homogeneous therefore the heterogeneity of preferences might be a problem, meaning that there will be losers and winners when a certain wage is agreed on. In addition, according to the graph 12.4 (page 328) the point where the union wage is negotiated is not on the supply curve, which makes the level w1 unattainable. If, however, the union decides to negotiate the wage w1 when the current wage is w2, this necessarily results in a request for lower wages in order to maximize the wage bill, which is not very likely.
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14. One possible way of explaining the behavior of labor unions is the so called Median Voter Model! Explain the model and its shortcomings!
The Median Voter Model is explained in figure 12.5. To explain the model if focus on seniority. Workers who have been hired most recently (those with the least seniority) are the first ones to be laid off in times of a fall in demand. ...Conversely, those with the most seniority are the least likely. Therefore, ceteris paribus, more senior workers are more likely to favor high union wage demands whereas less senior workers are more likely to favor low union wage demands. This demonstrates the heterogeneity of wage demand preferences from members. According to the median voter model, policies adopted will be the ones that reflect the preference of the voter whose position is in the middle. This is the wage the union will be most likely to demand in negotiations and such wage is in between those who favor high and those who favor low union wage demands. With this model at least half of the members would support the policy. The model has its shortcomings too. One such shortcoming is the fact that the distribution of wage preferences is due to the fear of layoffs that high wages threaten to bring about. Whenever the union succeeds in negotiating a higher wage then less senior workers will be laid off. These workers move out of union market which as such implies an ever-shrinking number of union workers.
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15*. List and explain some of the tactics that employers and labor unions use in their attempts to influent the bargaining power!
Unions: strike or threat of a strike, boycotts, picketing, political support.
Employers: lockout, continue with work only with managers, replacement of striking workers
timing very important important
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16*. If labor unions demand higher wages and employers are not willing to give in, the result is probably a strike! It can be proved that it is impossible for both sites to be better off after the strike! Under such circumstances, why is it not possible to avoid strikes? What are some of the explanations for their utilization?
Imperfect Information; Union remind or signal empoyears that they exist, like a weapon.
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17. Use the spillover and the threat effect to show problems I measuring the impact of unions on wages!
The Spill-Over Effect
The spill-Over effect occurs when unions by decreasing employment in the union jobs, cause the disemployed workers to seek jobs in the nonunion sector, with the result that nonunion wages are lower. The added supply reduces the nonunion wage.
The Wage Threat Effect
The wage threat effect occurs when nonunion firms raise wages to avoid being unionized. This generally occurs for nonunion plants and firms in highly unionized industries that are most threatened by unionization. For example, the Saturn plant in General Motors is nonunion but pays union wages.
Which effect predominates? If the wage threat effect predominated, such that all wages, union and nonunion, were increased, then we would witness massive unemployment! This has occurred in Europe, which has experienced high union wage increases and high unemployment in recent years. But in the United States, this pattern has not been observed. We can conclude that the spill-over effect predominates for the nation. Most likely, the threat effect predominates only in highly unionized industries and areas.
