• Theory of time allocationTheory of time allocation• Backward-bending labor supply curveBackward-bending labor supply curve• Nonwage factors in labor supplyNonwage factors in labor supply• Why wages differWhy wages differ• Unions and collective bargainingUnions and collective bargaining• Union wages and employmentUnion wages and employment• Trends in union membershipTrends in union membership

LABOR SUPPLYLABOR SUPPLY

Labor Supply and Utility Maximization

Two sources of utility:Two sources of utility:1)The consumption of goods and services2)The enjoyment of leisure

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““Spare time would be more fun if I Spare time would be more fun if I had less to spare.”had less to spare.”

The more leisure The more leisure time you have, time you have, the less you value the less you value an additional hour an additional hour of it.of it.

1) Market workMarket work– – time sold as labortime sold as labor

2)2) Nonmarket workNonmarket work– – time spent getting an education or time spent getting an education or

producing goods and services for producing goods and services for personal consumptionpersonal consumption

3)3) LeisureLeisure– – time spent on nonwork activitiestime spent on nonwork activities

• Work and UtilityDisutility – the oppose of utilityIncreasing marginal utility – the more you

work, the greater the marginal disutility of working another hour

Net utility of work – the utility of consumption made possible through earnings minus the disutility of the work itself

• Utility Maximization

• Substitution Effect of a Wage Increase– a higher wage encourages more work

because other activities now have a higher opportunity cost

Wages and Individual Labor Supply

• Income Effect of a Wage Increase– a higher wage increases a worker’s income,

increasing the demand for all normal goods, including leisure, so the quantity of labor supplied to market work decreases

• Backward-Bending Labor Supply Curve– as the wage rises, the quantity of labor

supplied may eventually decline; the income effect of a higher wage increases the demand for leisure, which reduces the quantity of labor supplied enough to more than offset the substitution effect of a higher wage

(see Exhibit 1)

Nonwage Determinants of Labor Supply

• Other Sources of Income• Nonmonetary Factors• The Value of Job Experience• Taste for Work

Market Supply of Labor (see Exhibit 2)

* The supply of labor to a particular market is the horizontal sum of all individual supply curves

Why Wages Differ

• Differences in Training, Education, Age, and Experience (see Exhibit 4)• Differences in Ability

Winner-Take-All Labor Markets– entertainment and pro sports

• Differences in Risk• Geographic Differences• Job Discrimination• Union Membership

(see Exhibit 3)

UNIONS AND COLLECTIVE BARGAINING

1) Labor Union – a group of workers who organize to improve their terms of employment

2) Craft Union – a union whose members has a particular skill or work at a particular craft, such as plumbers or carpenters

3) Industrial Union – a union both skilled and unskilled workers from a particular industry

• Collective Bargaining– the process by which union and management

negotiate a labor agreement

• Mediator– an impartial observer who helps resolve

differences between union and management

• Binding Arbitration– negotiation in which union and management

must accept an impartial observer’s resolution of a dispute

• Strike– a union’s attempt

to withhold labor from a firm to stop production

UNION WAGES AND EMPLOYMENTThree ways unions might increase wages:1)By forming an inclusive, or industrial, unions:

Negotiating a Higher Industry Wage (see Exhibit 5 & 6)

2)By forming an exclusive, or craft, unions: Reducing Labor Supply (see Exhibit 7)

3)By increasing the demand for union labor• Increase Demand for Union-Made Goods• Restrict Supply of Nonunion-Made Goods• Increase Productivity of Union Labor• Featherbedding – union efforts to force employers to hire

more workers than wanted or needed

Recent Trends in Union Membership• Right-to-work states – states where workers

in unionized companies do not have to join the union or pay union dues (see Exhibit 8)

Unionizing Information Technology Workers