CHAPTER 12 LABOR MARKETS AND LABOR UNIONS LABOR SUPPLY As a resource supplier you have a labor supply curve for each of the many possible uses of your labor In most labor markets your quantity supplied may be zero either because you are willing but unable to perform the job or because you are able but unwilling to do so Your labor supply to each market depends among other things on your abilities your taste for the job and the opportunity cost of your time Your supply to a particular labor market assumes that wages in other markets are constant Labor Supply and Utility Maximization There are two sources of utility that are of special interest in this chapter the consumption of goods and series and the enjoyment of leisure a valuable source of utility Leisure is a normal good that like other goods is subject to the law of Leisure s diminishing marginal utility explains why some of the idle rich diminishing marginal utility may grow bored in their idleness Three Uses of Time Time is the raw material of life You can use your time in three ways Market work selling your time in the labor market In return for a wage you surrender control of your time to the employer Nonmarket work using time to produce your owns goods and services Nonmarket work include the time you spend doing your laundry making a sandwich or cleaning up after yourself Leisure using your time in non work pursuits Work and Utility Work is subject to increasing marginal disutility the more you work the greater the marginal disutility of working another hour The net utility of work the utility of the additional consumption possibilities from earnings minus the disutility of the work itself usually makes some amount of work an attractive use of your time Utility Maximization As a rational consumer one attempts to maximize utility by allocating one s time so that the expected marginal utility of the last unit of time spent in each activity is identical Utility maximization doing what feels right implies that you act as if you allocated your time to derive the same expected net marginal utility from the last unit of time spent in each alternative use The time allocation process ensures that at the margin the expected net utilities from the last unit of time spent in each activity are equal Implications The higher your market wage other things constant the higher your opportunity cost of leisure and nonmarket work By the same logic the higher the expected earnings right out of high school other things constant the higher the opportunity cost of attending college Wages and Individual Labor Supply Substitution and Income Effects A higher wage has two effects on your use of time First because each hour of work now buys more goods and services a higher wage increases the opportunity cost of leisure and nonmarket work Thus as the wage increases you substitute market work for other activities This is the substitution effect of a wage increase Second a higher wage means higher income for a given number of hours This higher income increases your demand for all normal goods The income effect of a wage increase tends to reduce the quantity of labor supplied to market work As the wage increases the substitution effect causes you to work more but the income effect causes you to work less and demand more leisure Backward Bending labor Supply Curve The backward bending supply curve gets its shape because the income effect of a higher wage eventually dominates the substitution effect reducing the quantity of labor supplied as the wage increases We see evidence of a backward bending supply curve particularly among high wage individuals who reduce their work and consume more leisure as their wage increases Flexibility of Hour Other Sources of Income Ones willingness to supply labor depends on income from other sources including from family savings student loans and scholarships Nonmonetary Factors Labor is a special kind of resource Unlike capital and natural resources which can be supplied regardless of the whereabouts of the resource owner the supplier of labor must be where the work is performed Nonmonetary factors become important to labor suppliers since individuals must usually be physically present to supply labor The more attractive the working conditions the more labor you supply to that market other things constant The Value of Job Experience valuable job experience All else equal you are more inclined to take a position that provides The more a job enhances future earnings possibilities the greater the supply of labor other things constant Taste for Work The taste for work also differs among labor suppliers Some people have such strong preferences for certain jobs that they expect no pay such as auxiliary police officers or volunteer firefighters Based on taste workers seek jobs in a way that tends to minimize the disutility of work Market Supply of Labor The supply of labor to a particular market is the horizontal sum of all the individual supply curves Because different individuals have different opportunity costs and different tastes for work the bend in the supply curve occurs at different wages for different individuals Why Wages Differ A profit maximizing firm hires labor up to the point where labor s marginal revenue product equals its marginal resource cost that is where the last unit employed increases total revenue enough to cover the added cost Differences in Training Education Age and Experience Reduced supply and increased demand both raise the market wage Earnings tend to increase as workers acquire job experience and get promoted Differences in earnings reflect the normal workings of resource markets whereby workers are rewarded according to their marginal productivity Differences in Risk Research indicates that jobs with a higher probability of injury or death such as coal mining usually pay more other things constant Geographic Differences Workers often face migration hurdles Any reduction in these hurdles would reduce wage differentials across countries Discrimination in the job market Sometimes wages differences stem from racial and gender discrimination Wage differences trace to training education age experience ability risk of injury risk of job loss geography and racial and gender discrimination Unions and Collective Bargaining Types of Unions terms of employment A labor union is a group of workers who join together to improve their A craft union is limited to workers with a particular skill or craft The