Overview
Purpose:
To discuss how the demand for labor depends on the marginal value product and the real wage rate, and how labor unions affect the supply of labor, wages, and economic efficiency.
Objectives:
1. Marginal produce of labor.
a) The additional number of units of output a firm can produce because it has hired one more workers is the marginal physical product of that worker. The marginal value product of labor is the dollar value of the marginal physical product.
b) If a firm hires more and more workers (but does not increase or improve the equipment those workers can use), each additional worker’s marginal physical product will be less (diminishing returns to labor).
2. A profit-maximizing firm will not pay more for a worker than he contributes to output. A firm that is not buying more equipment will maximize profits if it expands production (hires more workers) up to the point at which the marginal value product of the last worker hired equals the going wage.
3. Labor unions can raise wages by artificially restricting the supply of labor available to the firm. In the long run this reduces the number of workers the firm will employ.
4. Unions can contribute to economic output by reducing labor turnover and by improving communication between workers and management. Unions can reduce economic output by obstruction technical change, by restrictive work rules and by exacerbating inflation.
| Key Economic Concepts labor-saving technology, collective bargaining, marginal product, bilateral monopoly, labor productivity, monopsony, diminishing returns to labor. |
| Contemporary Issues In 2002 and 2003, many airline unions made large concessions on wage cuts and reductions in their workforce, which only a few years before they would have vigorously resisted. The unions had little choice. An economic downturn, combined with the 9/11/2001 terrorist attacks, reduced airline traffic by about 15%. In an industry that was already plagued by excess capacity, this was devastating. It forced Two U.S. airlines (USAIR and United) into bankruptcy and led to a large wave of layoffs. In effect, both the airlines and the unions were fighting for survival. What might have happened if the unions had been less willing to make concessions? |
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