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Chapter 13

Government and the Labor Market: Legislation and Regulation


Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

1. Labor Law


Labor Law and Union Membership

o Pre-1930 period
Prior to the 1930s, union organizers and members were unprotected against retaliation by employers and the government. Employers used:
Discriminatory discharge Blacklists which denied workers chances to get employed elsewhere Yellow-dog contracts which prohibited workers from joining a union as a condition of employment

Labor Law and Union Membership

Lockouts or plant closedowns to stop organizing efforts. Strikebreakers Injunctions or court orders to stop strikes, picketing, or boycotts

Union membership was low during this period.

o Post-1930 period
Many labor relations laws were passed in the 1930s.

Labor Law and Union Membership

Norris-LaGuardia Act
Outlawed yellow-dog contracts and limited injunctions

Wagner Act
Gave unions the right to be free from interference from employers Gave unions right to bargain as a unit with employers Outlawed unfair labor practices

Labor union membership soared in 1930s.


Labor Law and Bargaining Power

o Limitation on use of injunction
This made union threats of a strike more credible and increased managements costs of disagreeing.
Union bargaining power rose.

o Prohibition of secondary boycotts

Secondary boycotts are actions by a union to refuse to handle, or get ones employer to refuse to buy, products made by a party to a labor dispute.

Labor Law and Bargaining Power

Example: Unionized truckers would refuse to haul steel made by firms involved in a labor dispute. Taft-Hartley Act of 1947 made these boycotts partly illegal and the Landrum-Griffin Act of 1959 eliminated the remaining exceptions. The elimination of secondary boycotts increased managements bargaining power since the unions cost of disagreeing rose.


2. Minimum-Wage Law


o The minimum wage is $7.25 and was last increased in July 2009. o Characteristics of minimum wage workers:
47% age 16 to 24 68% female 12% African-American 56% part-time workers


o Proponents argue the minimum wage:
Is needed to provide a living wage Stops exploitation by monopsonistic firms Shocks employers into greater efficiency

o Opponents argue the minimum wage:

Increases unemployment Reduces wages in sectors not covered by the law Encourages teenagers to dropout of school Most minimum wage workers dont live in poverty

Basic Model
At a minimum wage of Wm, employers will hire only Qd rather than Q0 workers. The higher minimum wage will encourage Qs workers to look for employment. Wage rate SL Wm W0 f a b e c

The impact on employment (ab) will be smaller than the impact on unemployment (ac).
The minimum wage will cause an efficiency loss of fae. The more elastic is SL and DL, the larger is the unemployment consequences.


Qd Q0


Quantity of Labor Hours


Incomplete Coverage
Wage rate Wage rate

The minimum wage Wm imposed on the covered sector reduces employment from C0 to C1.

The displaced workers from the covered sector Wm will seek employment in the uncovered sector and thus increase the supply of W 0 labor in the sector.

W0 DC Wu Du

Though total employment in the economy will remain unchanged, the wage in the uncovered sector will fall from W0 to Wu. Society will suffer an efficiency loss due to themisallocation of labor.
C1 C0

Quantity of Labor

U0 U1

Quantity of Labor

Shock Effect
A minimum wage such as Wm Wage rate may shock firms out of their organizational inefficiency. As a result, the marginal product of labor may rise, shifting the labor demand curve rightward (DL to DL). As a result, a portion of the unemployment predicted by basic model may be mitigated (xc rather than ac). It is unlikely that the shock effect is large since inefficiency can only exist in less competitive product markets and the minimum wage is usually binding in more competitive markets. Wm W0 a x c SL



Q d Q d Q 0 Q s

Quantity of Labor Hours


Wage and Employment for a Monopsonist

Without the minimum wage, this monopsonist will choose to hire Q0 and pay a wage equal to W0. Any legal minimum wage above W0 and below W2, will transform the firm into a wage-taker, and the firm will choose to increase its level of employment.
For example, if the minimum wage is W1, this firm will hire the same number of workers as if competition existed in this labor market. Thus, it is possible that a minimum wage might cause employment to increase in some industries. Wage rate MWC SL=PL W2 W1 W0

Q0 Q1
Quantity of Labor Hours

Other Considerations
o Union support
Unions lobby for higher minimum wages. Higher minimum wages help unions by raising the cost of nonunion of labor.
The higher cost of nonunion goods will increase the demand for union products.

o Efficiency wage considerations

Higher minimum wage will increase the unemployment rate and thus increase the penalty for shirking. Firms could lower their efficiency wage payments and thus decrease the unemployment 13-15 rate.

Empirical Evidence
o Employment and unemployment
A higher minimum wage reduces the employment of teenagers more than those of adults.
Teenagers are more likely to earn the minimum.

o Human capital
A higher minimum wage reduces on-the-job training and increases the dropout rate from high school.

o Poverty
The minimum wage has little effect on the poverty rate.

Questions for Thought

1. Explain how an increase in the minimum wage could:
(a) Reduce teenage employment but leave the teenage unemployment rate unaffected. (b) Reduce one type of investment in human capital but increase another. (c) Reduce above-market clearing efficiency wages paid to some workers in the economy.


3. Occupational Health and Safety Regulation


Rate of Occupational Fatalities by Industry, 2006

Services Trade Government Manufacturing Construction Transportation Mining Agriculture






Rate per 100,000 Workers


Optimal Level of Job Safety

As firms try to increase job safety, they face diminishing returns.

Increased job safety benefits the firm by permitting them to pay lower wages, reduce worker turnover, and have lower worker compensation rates. The additional increase in benefit to the firm declines as the level of job safety rises. Thus, firms face a declining marginal benefit of job safety.

MB, MC of Job Safety

That is, it becomes increasingly costly to increase job safety and so they face a rising marginal cost of job safety.




The optimal amount of job safety is at QS, where the MBS = MCS.

Quantity of Job Safety


Imperfect Information
MB, MC of Job Safety If workers have full information about work hazards and accurately assess job risks, QS level of job safety will optimize societys well-being. If workers are unaware of workplace danger or underestimate it, they will not be proper wage premium, and the firm will not gain the benefit of lower wages as it provides more safety. Thus, the marginal benefit of each unit of job safety will be less (MBS rather than MBS), and the firm will underprovide job safety from societys viewpoint (QS rather than QS). MCS



Quantity of Job Safety


Occupational Safety and Health Act

o In 1970, the Occupational Safety and Health Administration (OSHA) was given the task of developing and enforcing workplace safety standards. o Case for OSHA
Imperfect information, underestimation of risk, and barriers to occupational mobility prevent the labor market from providing the appropriate wage premiums for risk. Government standards are necessary to force firms to provide the optimal amount of job safety.

Occupational Safety and Health Act

o Case Against OSHA
Though information is imperfect, it is not clear that workers will underestimate the risks associated with job hazards.
They could overestimate the risk and generate too high a wage premium and no underallocation of job safety will occur.

Workplace standards often bear no relationship to reductions to job injuries and illness.

Occupational Safety and Health Act

o Empirical evidence
There is mixed evidence that OSHA has reduced occupational injuries. If OSHA has reduced job risks, wage premiums between hazardous and safe jobs should decline over time.


Question for Thought

1. Evaluate this statement: Profit-maximizing firms lack an incentive to provide job safety, and consequently, the federal government must intervene legislatively to protect workers against unsafe working conditions that surely will result.


4. Government as a Rent Provider


Economic Rent
o Economic rent in the labor market is the difference between the wage paid to a particular worker and the wage just sufficient to keep that person in his or her employment. o Government provides economic rents through occupational licensing and trade barriers.

Economic Rent
At the market wage of $16, employers will hire Q0 workers.
The labor supply curve indicates that these Q0 workers collectively receive economic rent equal to the area abc. The Qj worker receives a $4 per hour rent ($16 minus the persons opportunity cost of $12). Wage rate S

$16 b

$12 D



Quantity of Labor Hours


Rent Provision Through Occupational Licensure

Governments restrict entry into some occupations by requiring licenses in order to enter the occupation.
By setting a limit of 7,000 licenses in this labor market, government indirectly increases the wage from $16 to $22, thereby providing licensees collectively with an increase in economic rent of abce and creating an efficiency loss of efg. The efficiency loss may be greater than efg since the occupational group may have to spend resources to secure the licensing law. Wage rate a S c e b f S $22 $16

g D


Quantity of Labor (1,000s)


Rent Provision: Import Restrictions

Wage rate Governments can restrict imports through tariffs (taxes on foreign goods), quotas (limits on imports), and domestic content c laws (requirements that a $24 portion of the good be $20 domestically produced). b Import restrictions reduce labor demand in foreign nations and increase the demand for labor for specific types of labor in the protected country. These restrictions, therefore, cause increases in wages in these specific labor markets. In this case, the wage rises from $20 to $24, and economic rent increases by the amount bcef. S e f

D1 D0

Q0 Q1

Quantity of Labor Hours


Questions for Thought

1. How might each of the following be interpreted to be an example of rent provision by government?
(a) State laws the require out-of-state big-game hunters to be accompanied by one of a limited number of licensed in-state hunting guides.
(b) An increase in the minimum wage that increases the likelihood that firms will hire unionized labor rather than unskilled labor. (c) A state law that requires that graduates of dental schools pass a stringent examination, established by a panel of dentists, in order to practice dentistry.