In this video you’ll learn about the impact of trade unions, government and monopsonies
on labour markets.
Initially we learned about the perfectly competitive labour market and studied this diagram.
We are going to use this as our basis for analyzing the impact of trade unions, government
and monopsonies.
Let’s start with trade unions.
Trade unions are organizations of employees who join together as one group in order to
improve their working conditions.
They negotiate issues related to pay, work expectations, job security and the work environment.
If trade unions are successful in negotiating a higher wage rate than the market wage rate,
this could be of benefit to some of their members.
As the wage rate rises to Wtu, there is an increase in the quantity supplied of labour.
This is seen by the increase from Q* to Qs of workers willing to supply their labour.
However, there is a contraction in the quantity demanded of labour from Q* to Qd.
This is due to the higher wage rate and its impact on the costs of firms.
The situation we find ourselves in is an excess supply of labour.
This would result in unemployment for some trade union members.
However, this increase will still benefit those workers who were hired, quantity Qd.
The impact is similar with government intervention, specifically the minimum wage.
A minimum wage set by the government is the legal minimum employers are required to pay
their workers.
There are different reasons for why these are enacted, some of which we will discuss
here.
The government may mandate a national minimum wage to reduce poverty and improve workers’
living standards.
By earning higher wages, living standards improve for workers.
The minimum wage can also serve to reduce inequalities that may exist in the distribution
of income.
By forcing firms to pay out more to workers as opposed to shareholders, some income inequality
can be reduced.
However, a higher minimum wage could actually result in greater unemployment.
Let’s see why.
This is exactly the same diagram as before except for the reason for the higher wage
is the government mandated minimum wage.
If it is set higher than the equilibrium wage rate W*, it will result in excess supply and
thus create unemployment but will still benefit the Qd quantity of workers who receive the
higher wage.
Now we move to the impact of monopsonies, which are essentially monopoly buyers of labour.
If there is a single employer in an industry, they have significant negotiating power when
setting wages.
Consider the case of a remote coal mine, where workers have limited alternative employment
opportunities.
The monopsonist can exploit labour by taking advantage of this situation.
To understand how this can happen, let’s take a look at how wages and employment are
determined in a monopsony scenario.
If the mining company is looking for employees they would need to offer a wage to attract
a single worker.
There may be 1 person they could get to offer their labour at a wage rate of $10.
Their total cost for one unit of labour is $10 and their marginal cost of labour for
the first worker is $10.
But something interesting happens when they need to hire additional workers.
To get another worker to offer their labour, the mining company needs to offer a wage rate
of $11.
This means they need to pay the new worker $11 and go back and adjust the first workers
pay upward by $1.
This results in a total cost of $22 and a marginal cost of $12.
We get the marginal cost by subtracting the total cost of one worker from the total cost
of two workers and dividing by the change in the number of workers.
The change in this case is 1 worker, so we are dividing $12 by 1 giving us a marginal
cost of $12.
To hire a third worker they need to offer them $12 and also go back and pay the second
and the first the new higher wage.
This means their total cost of labour is $36 and their marginal cost is now $14.
To attract a fourth worker the firm needs to offer $13 and similarly pay that to all
of the previous workers bringing their total cost to $52 and their marginal cost to $16.
To bring in a fifth worker, the firm must offer $14.
The total cost of labour is $70 and the marginal cost increases to $18.
The sixth worker requires $15 to offer their labour and that would bring the total cost
to $90 as each previous worker must be paid the new higher wage.
This results in a marginal cost of $20.
Another way to see this is to see the marginal cost as the additional payment to the sixth
worker which is $15 plus the $1 increase each of the five existing workers receive.
In a competitive labour market, we would expect the equilibrium wage rate and quantity of
employment to be determined by the market forces of supply and demand.
This would result in an equilibrium wage rate of W1 and equilibrium level of employment
of Q1.
However, in the case of the profit maximizing monopsony, they will employ where MRP is equal
to marginal cost.
The profit maximizing level of employment is where the marginal revenue product of labour
equals the marginal cost of labour.
This occurs at Q2.
We find the wage offered to all workers by dropping down from the intersection of MC
and MRP to where it hits the supply curve of labour.
The monopsonist will offer a wage of W2 which corresponds to a level of employment at Q2.
Remember, workers are not paid wage W3 or equivalent to their MRP.
This is due to the monopsonists labour market power.
But suppose a trade union forms to challenge the monopsony.
This results in an interesting turn of events.
If a trade union sets a wage of W1 then the marginal cost of labour is equal to W1.
Each worker will cost the same.
Therefore, the firm will employ where the negotiated wage W1 is equal to marginal revenue
product.
This happens to occur at Q1 resulting in greater employment with a higher wage rate.
As long as the negotiated wage rate is between W3 and W1, the level of employment will increase.
If the trade union negotiates a wage rate above W3, they will decrease employment.
The ideal range is between W1 and W3.
Using the information in the table provided, how many workers should this monopsony firm
employ?
Pause the video, and proceed when you think you’ve got the answer.
The correct answer is 6.
If the employer wants to profit maximise, they should quantity of workers that results
in the situation where the MRP is equal to the marginal cost of labour.
Each worker will be paid a wage of $15.
By now you should have a much better understanding of the impact of trade unions, government
and monopsonies on labour markets.
If you found any of the diagrams particularly challenging, leave a comment as to why and
let’s discuss it together.
That’s us done for now and I will see you in the next one!