Labor Markets

This is Unit Thirteen of Principles of Microeconomics, part two of two: the single buyer of labor, the union that sells it collectively, and what happens when the two meet. Part one closed on monopsony, one buyer facing the whole supply of labor. This part works out what that buyer does: it hires fewer and pays less than competition would, because each added worker costs the raise for everyone already hired. Then power on the other side, the union, and the case where both meet. The four cases share one hiring rule and differ only in what the last worker costs. By the end you will be able to compute a monopsonist's outcome and compare it with competition. To say what a minimum wage does under each. To compute the union wage's employment cost and report why membership fell. To describe bilateral monopoly and define discrimination. And to read a pay gap in three steps, and run one labor market four ways.

Three entries on the single buyer: what a worker costs it, its outcome, and a floor under it.

What a worker costs it.

MIC 1217 Marginal Factor Cost Above the Wage

For a monopsonist, one more worker costs the wage plus the raise for everyone already hired, so marginal factor cost exceeds the wage: the fourth at one hundred, plus twenty each to three others, is one sixty. The anchor's name is the marginal cost of labor. It is the twin of monopoly: marginal revenue below price there, marginal factor cost above the wage here.

The monopsonist's choice.

MIC 1218 The Monopsony Outcome

From a labor supply schedule, compute total factor cost at each number of workers, the number times the wage that attracts them, then marginal factor cost as the change in total cost. Hire while marginal revenue product is at least marginal factor cost, then read the wage from supply at that number, and compare with competition, where hiring continues while marginal revenue product is at least the supply wage. The town's supply is one worker at forty dollars a day, two at sixty, up to six at one forty, so marginal factor cost is forty, eighty, one twenty, one sixty, two hundred and two forty, against marginal revenue product of three hundred, two sixty, two twenty, one eighty, one forty and one hundred. The fourth worker's one eighty beats one sixty and the fifth's one forty does not beat two hundred: four workers at the supply wage of one hundred. Competition would hire the fifth, whose one forty beats the supply wage of one twenty: five at one twenty. The wage comes from supply at the chosen number, never from the marginal factor cost column, and the fourth worker is worth one eighty and paid one hundred; that gap is why unions come next.

A floor under a monopsonist.

MIC 1219 A Minimum Wage: Competition Against Monopsony

In a competitive market a minimum wage above equilibrium cuts employment, like any price floor. Under monopsony it can raise employment, because it flattens marginal factor cost at the floor: a floor of one twenty makes the town's employer hire a fifth worker. Whether real markets are monopsonistic enough to matter is disputed, and both readings are reported.

Three entries on power on the supply side: unions, the union wage with numbers, and why membership fell.

Power on the supply side.

MIC 1220 Unions and the Union Wage

A union bargains for its members collectively, backed by the strike threat: a monopoly seller of labor. A union wage above equilibrium means firms hire fewer, and more want union jobs than exist; job loss can arrive as attrition or relocation rather than layoffs. Against a monopsonist the union pushes the wage toward workers' worth; against competitive firms it costs jobs.

The numbers.

MIC 1221 The Union Wage in a Competitive Market

From a labor market's demand and supply schedules, find the equilibrium wage and employment, then impose a union wage above it: read employment from demand at the union wage and the quantity supplied from supply, and report the employment loss and the excess supply. Then state the union's alternative: shifting demand right, by raising members' productivity or the demand for what they make, raises the wage without the job loss. Electricians are demanded at seven hundred down to three hundred for wages of thirty to fifty dollars an hour, and supplied at three hundred up to seven hundred; equilibrium is forty dollars and five hundred jobs. A union wage of forty-five cuts employment to four hundred while six hundred want the work: one hundred jobs lost, two hundred in excess supply. A training program that raises each electrician's marginal product shifts demand right and lifts the wage with no such loss. The lost jobs go to fewer hours, slower hiring and outsourcing as often as to layoffs, and the union also gains from restricting supply, by licensing or apprenticeship limits, which raises the wage by the same mechanism as the floor.

Whether productivity pays for the wage.

MIC 1222 Productivity, Substitution and Membership

If union workers are more productive, demand for them shifts right and the job loss shrinks. But firms also substitute capital for dearer labor; at a high enough wage the three-machine plan wins. Why membership fell is contested: services, imports, protective laws, the legal setting. All four are attributed, and the first three fail to explain countries that kept high membership.

Two entries on two powers and pay by group: a union meeting a monopsonist, and discrimination defined.

A union meets a monopsonist.

MIC 1223 Bilateral Monopoly

When a union meets a monopsonist, both want employment below the competitive level. The wage is indeterminate, between the monopsony wage and the most the employer would pay: between one hundred and one eighty for the town's fourth worker. Any wage won above the monopsony wage raises employment, since it flattens marginal factor cost like a floor.

Pay that differs by group.

MIC 1224 Employment Discrimination

Labor-market discrimination is paying workers of the same skill differently by race, gender or religion; two equally credentialed workers paid differently is the test case. A pay gap between groups is not proof by itself, since education, experience and hours must be equalized first. One view says competition punishes discriminating employers; another that customer prejudice can make it pay. Both attributed.

Two entries to close: reading a pay gap in three steps, and the unit's capstone, one labor market run four ways.

Reading a gap.

MIC 1225 Is It Discrimination?

Given two groups' earnings, work in three steps. List the productivity characteristics that should be equal before a gap counts: education, experience, hours, occupation and tenure. Ask what remains after those are held equal; that residual, not the raw gap, is the candidate. Then name evidence that shows discrimination directly: an audit that sends identical applications differing only in a name, or same-credential workers whose pay diverges over a career. One group earns eighty percent of another's pay. Holding hours and occupation equal it narrows to ninety percent; holding experience interrupted by care work equal it narrows again, and what survives all the controls is the residual that discrimination could explain, though an unmeasured characteristic could too. The direct evidence is different: an audit that sent identical résumés under different names found that names associated with White applicants received about fifty percent more callbacks, which no productivity difference can explain. That study is Bertrand and Mullainathan, two thousand four. A raw gap overstates discrimination and a fully controlled residual can understate it, since controls such as occupation may themselves be shaped by it, and the audit shows discrimination at the hiring door, not how much of a pay gap it explains.

One labor market four ways.

MIC 1226 One Labor Market Four Ways

One labor market run under competition, monopsony, a union and both at once shows how power on each side moves employment and the wage. Under competition the wage is set where market demand, the sum of firms' marginal revenue products, meets market supply; each firm takes that wage as its constant marginal factor cost and hires until marginal revenue product equals it, so workers are paid what the last one adds and employment is efficient. Under monopsony one buyer faces the whole supply curve, so marginal factor cost exceeds the wage; it hires where marginal revenue product equals that cost, fewer than competition, and pays the lower supply wage for that number, and the missing workers are a deadweight loss of monopoly's shape. Under a union in a competitive market the seller has power: the union sets a wage above equilibrium, firms hire fewer, and the excess supply is the union's rationing problem. Under bilateral monopoly the two powers meet. The employer wants the monopsony wage and the union wants the last worker's marginal revenue product, and the wage lands between by bargaining strength; but any union wage above the monopsony wage flattens the employer's marginal factor cost there, so employment rises toward the competitive level. The four cases share one rule, marginal revenue product equals marginal factor cost, and differ only in what marginal factor cost is: the wage, above the wage, the union's wage, or a bargained flat line. The town's supply runs from one worker at forty dollars to six at one forty, rising by twenty, against marginal revenue product of three hundred down to one hundred. Competition: five workers at one twenty. Monopsony: four workers at one hundred. A union alone, demanding one forty of competitive firms: five hired, six want work, one in excess supply. Bilateral: the union asks one eighty, the employer offers one hundred, they settle at one twenty, marginal factor cost is flat there up to five workers, and the employer hires the fifth. Three cautions. Monopsony's fewer workers and lower wage compare with competition on the same curves, and the wage can still be high in absolute terms. The union raises employment only against a monopsonist; against competitive firms the same wage costs jobs. And bilateral monopoly's indeterminate wage is a result, not a gap: where two parties with power bargain, economics bounds the outcome and does not pick it.

Look at what you can now do. You can compute a monopsonist's marginal factor cost as the change in total factor cost, hire where marginal revenue product meets it, read the wage from supply, and show that it hires fewer and pays less than competition. You can say that a minimum wage cuts employment under competition and can raise it under monopsony, and report that how much real markets resemble monopsony is disputed. You can compute a union wage's employment loss and excess supply, name shifting demand as the alternative, and list the four attributed causes of falling membership. You can describe bilateral monopoly as a wage bounded but not picked, and define discrimination as different pay for the same skill, with a raw gap as no proof by itself. And you can read a pay gap in three steps to a residual and an audit, and run one labor market four ways under one rule. Unit fourteen asks how the wages this unit sets add up to a distribution.