Chapter Review: Key Points. 1 The marginal revenue product curve (MRP) for a firm selling in an imperfectly competitive product market will be below the value of the marginal product of

1 The marginal revenue product curve (MRP) for a firm selling in an imperfectly competitive product market will be below the value of the marginal product of labor (VMP) curve. All firms will hire labor until the marginal revenue product equals the marginal factor cost (MFC) of labor. Because MRP < VMP, employees of firms with market power, are paid less than the values of their marginal products. This difference is called monopolistic exploitation.

2 A monopsonist is the sole buyer of a particular resource or good. Labor monopsonists face an entire market supply of labor and, if all workers are paid equally, their marginal factor cost curve will lie above the labor supply curve. Relative to pure competitors, labor monopsonists pay lower wages and hire fewer workers. In addition, labor will be paid less than the value of its marginal product, a difference referred to as monopsonistic exploitation.

3 When competitive conditions prevail in both resource and product markets, the firm hires labor until VMP = MRP = MFC = w. When monopoly prevails in the product market but the monopoly firm hires labor under competitive conditions, labor is hired up to the point where VMP> MRP = MFC = w. Given a competitive product market and monopsony power in the labor market, a firm will maximize profits by hiring labor until VMP = MRP - MFC > w. Finally, when a firm has both monopoly and monopsony power, labor is hired up to the point where VMP > MPJ¹ = MFC > w. Any difference between VMP and w represents exploitation, a term borrowed from Marxist jargon.

4 A minimum wage legally set above the equilibrium wage in competitive labor markets will raise unemployment. It is possible, but unlikely, that minimum wages might increase employment and wages simultaneously, but only where there is substantial monopsonistic exploitation of unskilled workers and wage discrimination is notpracticed, - an unlikely combination! A union wage hike might have the same effect. However, the markets where minimum-wage hikes raise existing wages are typically rather competitive. Thus, increased unemployment is the normal result when minimum wages are increased.

5 Unions have traditionally organized into craft or industrial unions. Craft unions were the bulwark of the American Federation of Labor (AFL); industrial unions comprised the Congress of Industrial Organizations (CIO). Frequent jurisdictional disputes over which organization would represent particular workers caused the two to merge intothe AFL-CIO in 1955.

6 Unions and their leaders use several kinds of agreements with organized firms to protect their prerogatives as sole bargaining agents for workers. Closed shops require workers to be union members as a precondition for employment. At the other end of the spectrum, open shops permit union and nonunion members to work side by side.

This arrangement is quite unsatisfactory to unions since nonmembers receive the benefits of collective bargaining but need not pay union dues. Union shops are compromises between closed and open shops. The employer can hire union or nonunion workers, but an employee must join the union within some specified period (usually 30 days) to retain the job. The Taft-Hartley Act of 1947 outlawed the closed shop and permitted individual states to pass right-to-work laws forbidding union shops. In many of these states, agency shops have been created to protect unions from free riders. Workers may choose not to belong to the union but must pay dues.

7 Unionism developed in a hostile environment. The Great Depression shifted public policy in favor of collective bargaining. As trade unionism grew, many felt that unions became corrupt and too powerful, and tighter organizing and financial reporting constraints were imposed on labor organizations. The union movement was relatively stable from roughly 1950 until 1980, but has declined as a percentage of the total labor force in the 1980s. The labor force increasingly consists of white-collar workers who are reluctant to join unions.

8 Bilateral monopoly, a very early model of collective bargaining, describes the limits to the wage bargaining process but provides little predictive power. Sir John Hicks' bargaining model predicts both final wage settlements and the duration of strikes.

9 Labor unions have typically employed three methods to increase the wages of their members: (a) reductions of the supply of workers to an industry; (b) establishing higher wages and then parceling the available work to members; and (c) policies designed to increase demands for union labor.

10 Wage differentials between union and nonunion workers average roughly 10-15 percent. Some people blame inflation on excessive union wage demands. Large wage hikes in key industries may set the pattern for other industries. Higher wages may raise unemployment and induce public officials to pursue expansionary macroeconomic policies, further intensifying inflationary pressures. Since organized labor represents less than one-sixth of the work force, it is unlikely that unionism explains much inflation.

11 A small percentage of collective bargaining negotiations end in strikes, and most arе short. Strikes often impose costs on individuals and firms that are not direct parties to labor negotiations. Strikes may cause shortages, shipping delays, or losses of perishable products.

12 Public employee unions frequently mix politics and collective bargaining to win their demands. Public officials negotiating contracts are seldom those who are responsible for developing government budgets; thus, they may have only weak incentives to resist union wage demands. (5115 digits)

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