Answers To Chapter 13

Transcription

1 nswers To Chapter 13 Review Questions 1. nswer c. ote that bargaining often takes place simultaneously with a number of employers. The FL-CIO is largely a political action group. It is not involved directly in the collective bargaining process. 2. nswer c. It is perfectly legal for employers to explain to employees why joining a union is not in their best interest, but they cannot threaten or discriminate against those that do. 3. nswer a. The replacement of striking workers (b) is legal. nswers c and d are examples of unfair labor practices. 4. nswer a. Workers with short job tenures are less likely to join unions since many of the things unions bargain for (seniority rules, job security arrangements, pensions) are of little benefit to someone who does not expect to stay with the firm. 5. nswer b. Increased employer resistance raises the cost of union organizing activity and shifts the supply curve to the left. 6. nswer a. lthough the Reagan administration s replacement of striking air traffic controllers is often cited as an action of the federal government that contributed to the decline of unions, this action was taken under existing federal law and did not represent new legislation against unions. Growing female participation in the labor force was probably more of a factor in the first half of this period than it has been in the second half. 7. nswer c. Every point on the demand curve is a point of profit maximization. To stay at the same profit level as one moves to alternate levels of employment, wages must fall to keep profits at the specified level. ote that profits fall as the firm is forced up its labor demand curve by higher union wages. 8. nswer c. If it is possible to make someone better off without hurting anyone else, then it makes sense to move away from the current combination. n efficient contract has been reached only when these kinds of moves are no longer possible. ote that the firm s profits serve as a constraint on the union s ability to maximize utility. 9. nswer d. rapidly growing product demand should translate into a growing demand for labor that can be used to mask the adverse employment effects of union wage increases. n inelastic supply of substitute inputs reduces the incentive of a firm to substitute other inputs for labor. ote that a highly elastic product demand leads to a more elastic labor demand. 10. nswer d. ccording to the Hicks-Marshall laws presented in Chapter 4, all of these factors should lead to a more elastic labor demand.

2 334 Ehrenberg/mith Modern Labor Economics: Theory and Public Policy, Tenth Edition 11. nswer d. ll of these factors limit the firm s ability to substitute other inputs for union labor and so make the demand for labor more inelastic. 12. nswer c. Occupational licensing laws restrict entry into a profession and so limit a firm s ability to find substitutes for union labor. 13. nswer d. The Hicks bargaining model predicts that settlements will be made in advance when both parties are aware of how the other s bargaining position will change over time and that the union is not using the strike to strategically enhance its bargaining power in future negotiations. ee Figure 13.6 in the text for an example of a union resistance curve that is not always downward sloping. 14. nswer d. ote that wait unemployment can cause the relative wage advantage to understate or overstate the absolute union wage effect. 15. nswer c. Expected earnings in each sector are equal when W U F U = W F W 1 FU = F FU = (1) = 0.8. W 1.25 U 16. nswer d. ll factors that can influence wages must be held constant before the relative union wage advantage can be identified. 17. nswer d. Limits on the substitution of capital for labor mean that the firm may not be able to produce using the most efficient combination of inputs. ote that empirical evidence associates unions with lower quit rates, which would likely increase productivity. 18. nswer b. If unions allow workers to communicate more effectively with management, workers may be able to resolve problems without quitting. Lower quit rates lead to longer job tenures. 19. nswer a. Person should voluntarily accept only those shares that yield a higher level of utility than the level that is expected to result from arbitration. ote that if the person is risk averse, the expected, or average, utility from arbitration will be less than the utility level associated with the average arbitration settlement. 20. nswer a. The contract zone, like the contract curve in the efficient contract model, is where the parties should move in order to make themselves better off. 21. nswer d. Increasing the arbitrator s range of possible outcomes and/or increasing the curvature of the utility function lowers the average utility associated with the arbitrated outcome. The lower the average utility associated with the arbitrated outcome, the lower the share that will be needed from a voluntary settlement to make any individual better off.

3 nswers To Chapter Problems 22a. ubstituting W = $10 into the original demand yields an employment level of 80. ubstituting W = $15 into the new demand equations yields an employment level of b. If the wage had remained at $10, the demand shift would have increased employment to 100. lternatively, one could argue that without the demand shift, the increase in the wage would have reduced employment to 70. Either approach suggests that the union wage increase reduced employment by 10 relative to what it could have been. 23a. ee Figure Figure b. Profit maximization occurs at the employment level where MRP L = ME L 40 4L = 4L L * = 5. L * = 5 W * = 2(5) = c. The firm now faces a fixed ME L of $16 and so profit maximization occurs where 40 4L = 16 L * = 6. ee point a in Figure In this case, the higher wage is associated with a higher employment level. 23d. Employment is maximized at the point where the labor supply curve intersects the MRP L curve. ee point b in Figure L = 2L L * = L * = 6.67 W * = 2(6.67) = a. For a firm that sells its output in a perfectly competitive market MRP L = (P)(MP L ) MRP L = 5(10 L) = 50 5L. This curve appears as the line labeled D in Figure 13-2 in the pplications section.

4 336 Ehrenberg/mith Modern Labor Economics: Theory and Public Policy, Tenth Edition 24b. Profit maximization MRP L = W ee point a in Figure L = 15 L * = 7. L * = 7 Q * = (10)(7) (0.5)(49) = c. π = PQ WL π = (5)(45.5) (15)(7) = $ *24d. To find the isoprofit curve expression, find those combinations of W and L that yield a profit level of $ ubstituting the production function and the price of output into the profit expression yields = (5)(10L 0.5L 2 ) WL = 50L 2.5L 2 WL *24e. ee the isoprofit curve labeled I 3 in Figure f. Profit maximization MRP L = W 50 5L = 30 L * = 4. ee point b in Figure a. Equilibrium in the union sector Equilibrium in the non-union sector WL = 50L 2.5L W = L. L L * = 4 Q * = (10)(4) (.5)(16) = 32. π = PQ WL π = (5)(32) (30)(4) = $ W = W W * = 20. W * = 20 L * = W = W W * = 20. W * = 20 L * = b. n increase in the union wage from $20 to $22 represents an absolute wage effect of 10%. ote that the increase in the union wage reduces the quantity of union labor demanded to D L U while the quantity of labor supplied increases to = (22) = 19, L = 22. Together this creates a labor surplus in the union sector of 3 units. U

5 nswers To Chapter c. The new supply curve in the union sector becomes LU = W 3, while the supply curve in the non-union sector becomes L = W + 3. The supply shift in the union sector is just enough to eliminate the unemployment in that sector. The increase in supply in the non-union sector creates a surplus in that sector at the original wage of $20. However, since the wage is free to adjust in the non-union sector, the market will clear where 60 2W = W + 3 W = $19 and L = 22. * * ote that after the spillover adjustment is complete, the union wage ($22) exceeds the non-union wage ($19) by $3 for a relative wage advantage of 15.8%. 25d. ince there is no unemployment in either sector after the spillover, expected earnings equal $22 in the union sector and $19 in the non-union sector. This should lead to a movement of some workers back to the union sector. 25e. The unemployment rate in the union sector will be 2 UR = = F U = = W U F U = (22)(0.905) = $19.9. In the non-union sector, the market will clear where 60 2W = W + 1 * W = $19.67 and L = * ince there is no unemployment in the non-union sector, expected earnings equal $ Wait unemployment is rational here since workers should continue to flow back to the non-union sector as long as expected earnings there are greater than in the non-union sector. 25f. The unemployment rate in the union sector will be 3 UR = = F U = = W U F U = (22)(0.864) = $19. In the non-union sector, the market will clear at the original wage and employment levels * * W = $20 and L = 20. ince there is no unemployment in the non-union sector, expected earnings equal $20. This suggests that the optimal amount of wait unemployment in this example is under 3 workers. s a result the wage in the non-union sector will be less than $20. If the non-union wage is less than $20, then the relative union wage advantage will overstate the absolute wage effect of the union.

6 338 Ehrenberg/mith Modern Labor Economics: Theory and Public Policy, Tenth Edition 26a. Equilibrium in the union sector W = 1.5W W * = 12. W * = 12 L * = 18. ote that in this example the demand shift does not raise the wage but it does eliminate the excess supply associated with the union wage. 26b. Equilibrium in the non-union sector 36 2W = 2W W * = 9. W * = 9 L * = 18. In the non-union sector, the demand decrease lowers the wage from $10 to $9 and decreases employment from 20 to c. Ignoring any wait unemployment effects, the relative wage advantage of 33% overstates the absolute union wage effect of 20%. 27a. = 0.5 U = 0.5 = b. = 0.25 U = 2.5 = 0.5. = 0.75 U =.75 = c. Expected utility from arbitration is 1 1 (0.5) + (0.866) = ince receiving a share of 0.5 with certainty yields a higher level of utility (0.707) than receiving a share of 0.5 on average (0.683), the person exhibits risk-averse preferences. 27d. = = share of 0.47 received with certainty yields the same level of utility that can be expected from arbitration. 27e. ince the shares must add to one, the maximum share B could receive is f. ince B has the same preferences as, the minimum share B would accept is 0.47 and the maximum could receive is g. The contract zone consists of those shares between 0.47 and 0.53.

7 nswers To Chapter h. 1 1 = U = = 0.577, and 3 3 Expected utility from arbitration is 2 2 = U = = (0.577) + (0.816) = = = The contract zone consists of those shares between and otice that a smaller spread between the arbitrator s settlements reduces the contract zone. ssuming the size of the contract zone is directly related to the probability of a voluntary settlement, the chances for a voluntary settlement have been reduced. pplications 28. This paradox can be resolved by noting that wages are only a part of total compensation. Evidence suggests that public sector unions have had a larger effect on employee benefits than on wages since employee benefits are not as readily observed and their full costs can often be deferred. s a result, is not clear that public sector unions have had a smaller effect on the total compensation of their members. 29a. Point b is not efficient since it is possible to make one party better off without hurting the other. For example, by moving to point c, the union is better off and the firm is still at the same profit level. On the other hand, moving to point d increases firm profits while leaving the union at the same level of utility. 29b. Each point along the line cd is a point of tangency between a union indifference curve and a firm isoprofit curve. However, the outcomes are not necessarily equitable. Points closer to c are better for the union and worse for the firm, while points closer to d are better for the firm and worse for the union. Regardless of which party gains the most, all the points along cd are better than point b. 29c. While there may be few explicit agreements on employment, Chapter 11 pointed out that provisions of an employment contract are often implicit. 30a. In the asymmetric information model, union leaders, through their involvement with management during the bargaining process, may become well informed about the firm s true financial position and the maximum wage offer the firm can make. If this offer is less than what the membership expects, union leaders may recommend a strike even though they know it will not change the firm s wage offer. uch a strike will gradually serve to moderate the members wage demands while at the same time allowing the union leaders to appear to be strong and decisive leaders. 30b. Perhaps the firm would have been more receptive to productivity bargaining. Under this type of bargaining, the union and employer explicitly agree to certain increases in compensation contingent on work rule changes and productivity increases. 31a. Workers will be demanded up to the point where the real wage equals the marginal product of labor. Therefore, a real wage of 25 translates into an employment of 6 workers in each sector. Output in each sector will be 225 for a total output of 450.

8 340 Ehrenberg/mith Modern Labor Economics: Theory and Public Policy, Tenth Edition 31b. wage increase to 35 in the union sector should reduce employment to 4 and output to c. n employment of 8 in the non-union sector should drive the wage down to 15 and increase output to d. Total output after the labor spillover is 430 compared to 450 before the union wage increase. The allocation of labor is not optimal since the marginal product of labor is higher in the union sector than in the non-union sector. 31e. ssuming no spillovers, output would be 170 in the union sector and 225 in the non-union sector for a total output of 395. This represents a decline of 55 units from the original level. 31f. collective voice is necessary since many improvements in the workplace can be likened to public goods. public good is something that no one can be excluded from once it is provided. good example is national defense. If workplace changes are like public goods, individuals may not come forward to bring about change, reasoning that if they wait for someone else to come forward, they will share in the benefits without bearing the costs. Individuals may also not come forward out of fear of retaliation by the firm.