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Unit 9 — Labor and Management

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Purpose:

To discuss how the demand for labor depends on the marginal value product and the real wage rate, and how labor unions affect the supply of labor, wages, and economic efficiency.

Objectives:

  1. Marginal product of labor.

    1. The additional number of units of output a firm can produce because it has hired one more worker is the marginal physical product of that worker. The marginal value product of labor is the dollar value of the marginal physical product.
    2. If a firm hires more and more workers (but does not increase or improve the equipment those workers can use), each additional worker’s marginal physical product will be less (diminishing returns to labor).
  2. A profit-maximizing firm will not pay more for a worker than he/she contributes to output. A firm that is not buying more equipment will maximize profits if it expands production (hires more workers) up to the point at which the marginal value product of the last worker hired equals the going wage.
  3. Labor unions can raise wages by artificially restricting the supply of labor available to the firm. In the long run this reduces the number of workers the firm will employ.
  4. Unions can contribute to economic output by reducing labor turnover and by improving communication between workers and management. Unions can reduce economic output by obstructing technical change, restricting work rules, and exacerbating inflation.

Audio and Transcripts

Meet the Series Experts

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Jack Barbash

Jack Barbash

Educator and an architect of the 1955 merger of a divided trade union movement into the AFL-CIO.

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Douglas Fraser

Douglas Fraser

A leader in the U.S. trade union movement, where he rose to the highest ranks of the United Auto Workers (UAW).

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Leon Stein

Leon Stein

Union advocate, organizer in the International Ladies' Garment Workers' Union (ILGWU), and author who wrote about that union’s history.

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Peter Van Doren

Peter Van Doren

Senior Fellow at the Cato Institute, Editor of the quarterly journal Regulation, and expert in the regulation of housing, land, energy, the environment, transportation, and labor.

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  1. A technological breakthrough that makes workers twice as efficient on the job will tend to have which of the following effects? It will shift the...

    Demand curve to the right. This is so because it will increase output per worker, thus making each worker more valuable to an employer.

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  2. In a national union, the authority to set policy for the union is held by the:

    delegates to the union convention.

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  3. The equilibrium wage for this market will be:

    chart chart

    W4. This is the point at which the demand and supply curves intersect.

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  4. This wage represents an equilibrium because...

    chart chart

    a higher wage would produce an excess supply; a lower wage, an excess demand.

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  5. In recent years some observers have pointed optimistically toward a growing spirit of cooperation between unions and management — though much remains to be done. Probably the MAIN reason for this trend toward cooperation is:

    a desire to survive in a highly competitive economy under increasing pressure from foreign competition.

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  6. In the early 1900s, managers generally refused to grant wages to garment workers because:

    they could get all the workers they wanted at the wages they were paying.

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