Outline

I.      The Model of Perfect Competition

        A.      According to the model of perfect competition, no firm is capable of influencing the price of labor (the wage rate)--nor can workers dictate how much they are paid
        B.      Similarly, the competitive firm is assumed to be a price taker in the labor  market as well as the product market

II.     The Demand for Labor

        A.      The Firm's Demand for Labor
                1.      Firms will hire additional units of labor according to their additional contribution to production--the marginal product of labor
                2.      The marginal revenue product of labor refers to the increase in total revenue to a firm resulting from the hiring of an additional unit of  labor
                3.      The labor demand curve of a firm is based on the MRP of labor
        B.      The Market Demand for Labor
                1.      The market demand for labor, the total demand for labor at each wage by all firms in the labor market, is obtained by summing the labor demand  (or MRP) curves of the individual firms in the market
                2.      Demand for labor is a derived demand--it is dependent upon the demand  for the product it produces

III.    The Supply of Labor

        A.      Labor Supply of an Individual
                1.      An increase in wages typically produces offsetting effects
                        a.      The substitution effect refers to the change in the amount of  labor supplied that can be attributed to a change in the opportunity cost of leisure
                        b.      The income effect refers to the change in the amount of labor supplied that can be attributed to a change in income
                2.      The individual's labor supply curve may be backward-bending if the individual responds differently to a wage change, depending on the value of the wage
                3.      Studies suggest that females may be more responsive to the substitution effect than males, whereas the income effect may predominate for males
        B.      The Market Supply of Labor
                1.      The market supply of labor is the total amount of labor supplied to the  market at each wage
                2.      Workers tend to be very responsive to wage differences across markets

IV.    The General Rule for Hiring:  MRP = MRC

        A.      Regardless of the type of market, a firm seeking to maximize profit should hire up to the point at which MRP = MRC
        B.      Even though the rule is general, the values of MRP and MRC depend on the nature of the product and labor markets
                1.      If monopoly arises in either the labor or product market, a lower level of employment will result
                2.      If monopoly power exists in the labor market, the wage rate will be reduced--monopoly power in the product market has no impact on the wage rate

V.     Shifts in Labor Demand

        A.      Product Demand
                1.      An increase in product demand increases marginal revenue and MRP
                2.      A decline in product demand lowers MRP
        B.      Marginal Productivity of Labor
                1.      A change in the quantity or quality of capital is likely to change the marginal product schedule--and the demand for labor
                2.      Whether labor demand falls or rises depends on whether capital and labor are substitute or complementary inputs
                        a.      If one input may be substituted for another in production, a rise in the price of one will increase the demand for its substitute
                        b.      In the case of complementary inputs, an increase in the price of one reduces demand for the other

V.     Wage Determination

        A.      Wage rates are determined in competitive markets by the interaction of labor supply and demand
        B.      Although market labor supply is upward-sloping, the fact that individual firms cannot affect the price of labor produces a horizontal labor supply curve facing ach firm

VI.      Wage Differentials

        A.      Since labor supply and demand vary across markets, workers in markets in which labor demand is high relative to supply earn more than workers performing the ame work in less favorable market conditions
        B.      Differences in innate ability can lead to economic rents--a return paid to a  market scarce natural talent that may significantly exceed the wage available in the next best alternative line of work


VII.    Compensating Wage Differentials

        A.      According to the theory of compensating wage differentials, a wage premium must  be paid to attract workers to a job with unpleasant characteristics
        B.      Research indicates that jobs that offer little job security or high risk of injury or death typically pay higher wages than do "safe" occupations

VIII. Market Imperfections and Discrimination

        A.      Wage differentials would exist even in perfectly competitive labor markets
        B.      Job discrimination and perhaps the existence of labor unions tend to accentuate such inherent imperfections

IX.     Labor Unions

        A.      A union is an organization of workers that negotiates on a collective basis in order to increase the bargaining power of the workers
        B.      The activities of unions may influence the wages of nonunion workers as well as those of their members

X.      How Unions Raise Wages of Their Members

        A.      Increasing the Demand for Union Labor
                1.      Since labor demand is derived from product demand, it is in the union's best interest to attempt to stimulate product demand for those firms that employ union members
                        a.      The union-labor campaign strives to stimulate product demand for firms employing union labor
                        b.      Unions often lobby to pass legislation that requires the use of union labor or favors heavily unionized industries
                2.      Featherbedding, a practice by which firms are forced to pay for more labor than is required to produce a given amount of output, may be used to legally expand the demand for union labor
        B.      Restricting the Supply of Labor
                1.      Restriction of labor supplies may be used to raise wages
                2.      Licensing boards and apprenticeship programs are often used to reduce  labor supply
        C.      Collective Bargaining
                1.      Collective bargaining is the process through which unions and management negotiate wages, fringe benefits, and nonmonetary terms of employment
                2.      Generally, both parties prefer the process of collective bargaining to  the use of a strike

XI.     How Unions Affect Wages of Nonunion Workers

        A.      Higher union wages often prompt nonunion firms to raise their wages in an attempt to keep the union out
        B.      If higher union wages reduce total union employment, some workers may be forced into lower-paying nonunion jobs

XII.    The Union Wage Premium

        A.      On balance, union members seem to receive a wage premium of about 15 percent  compared to nonunion workers of similar skills and backgrounds
        B.      Generally, union membership tends to be of greatest benefit for low-paid workers; minorities and women may benefit more than white males


XIII. Nonwage Effects of Unions

        A.      In addition to wages, unions directly affect fringe benefits
        B.      Union strikes and featherbedding activities reduce output
        C.      Unions may provide resolutions of worker complaints and improve morale
        D.      Unions affect the distribution of income and may help narrow the "wage gap" suffered by minorities
        E.      Unions frequently become involved in activities designed to advance or protect the rights of individual workers or social groups, and they demand that workers be treated with dignity