24 Lecture%20Unions%202%202010

24 Lecture%20Unions%202%202010 - LECTURE 24 NON-COMPETITIVE...

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Unformatted text preview: LECTURE 24 NON-COMPETITIVE LABOR MARKETS 2 ANNOUNCEMENTS Problem Set 5 due Today Extra Credit due on Tuesday after break. MONOPOLY UNIONS A union that is a sole seller of labor b The union sets wages b The firm responds with an employment level The model suggests some workers lose their jobs Unions are better off when the labor demand curve is less elastic b More likely to form THE BEHAVIOR OF MONOPOLY UNIONS Employment E M E * w * w M U D M The monopoly unions constraint is the demand curve D. A monopoly union maximizes utility by choosing the point on the demand curve D that is tangent to the unions indifference curve. Wage ($) EFFICIENT CONTRACTS The firm and the union could make a deal that makes at least one of them better off without making the other worse off The efficient contract curve lies to the right of the labor demand curve Efficient contracts imply that unions and employers bargain over wages and employment EFFICIENT CONTRACTS AND THE CONTRACT CURVE U * U M U R U Z w * E * w Z E Z w M P Q R Z Employment Dollars M * M Z If all bargaining opportunities between the two parties are exhausted, the union and firm agree to a wage- employment combination on the contract curve PZ . STRIKES A strike occurs when neither party is willing to give in when negotiating Because strikes are costly, they shrink the amount of rents over which the parties are negotiating When parties have good information about the costs and likely outcome of a strike, then it is irrational to strike The fact that irrational strikes occur is known as the Hicks Paradox THE HICKS PARADOX: STRIKES ARE NOT PARETO OPTIMAL Rents Firm's Rents S R U Union's 100 R F R * 25 25 100 40 40 50 50 75 75 The firm makes the offer at point R F , keeping $75 and giving the union $25....
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24 Lecture%20Unions%202%202010 - LECTURE 24 NON-COMPETITIVE...

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