Lecture 4 1-26-2012

Lecture 4 1-26-2012 - 151 lecture notes The Monopsony...

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151 lecture notes January 26, 2012 The Monopsony Model (continued) and the Efficiency Wage Model I. Sources of monopsony power A. Spatial mobility costs 1. Limited number of employers in local labor market; commuting costs. 2. Relocation costs that limit the job market for one working spouse when the other transfers to another city. B. Dynamic mobility costs 1. Sometimes referred to as the dynamic monopsony model or the flow monopsony model (for labor flows). 2. In this version, employees face costs of leaving the firm and employers face costs of recruiting and retaining new workers. Example of employee costs of moving (“frictions”): --Benefits of incumbency after a trial period (such as health insurance). --Increases in firm-based seniority leads to increased pension benefits and greater likelihood of investments in general and specific training, which means employers want 1
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to retain workers, not replace them, even if others are available who are willing to work for lower pay. --Job searches take time and cannot be done continuously, so most of the time an incumbent worker has only one employment possibility and works as a loyal and committed employee. --Workers may not be able to negotiate for higher pay because the firm knows that it is the only firm in the market for workers in any given time period and it knows that the workers’ commitments to the firm may last many time periods. C. Information costs Workers may be ignorant of other labor market opportunities. D. Search and matching models --Individual workers vary in their preferences for job and employer attributes—such as chances of big bonuses, hazardous work, flexible hours, job content (interpersonal skills versus technical skills), the likelihood of stock options if a start-up succeeds. --Matches take time and once achieved generate longer- term commitments between the employer and the employee. 2
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E. Short run versus long run 1. Most firms have monopsony power in the short run, since they could lower their wages relative to inflation or to other firms somewhat without losing most of their work force. That is, labor supply has some inelasticity in the short run.
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This note was uploaded on 02/21/2012 for the course ECON 151 taught by Professor Staff during the Spring '08 term at Berkeley.

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Lecture 4 1-26-2012 - 151 lecture notes The Monopsony...

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