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ECON 208 (210)
Lecture

Chapter 14.docx

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Department
Economics (Arts)
Course
ECON 208
Professor
Sebastien Forte
Semester
Summer

Description
 Chapter 14: Labour Markets  Unions- increased workers bargaining power to restrict output as a group (somewhat like a cartel)  Wage differentials in competitive markets: in competitive labour markets, supply and demand set the equilibrium wage and level of employment  Wages will still differ across workers if there are “compensating differentials” (like language)  Even if all jobs were the same (no compensating differentials), there may still be some equilibrium wage differentials: 1. Inherited skills are different across workers and can be important 2. Investment in human capital is costly, and the return is usually in terms of higher future wages  Changes in market conditions change the costs and benefits of acquiring human capital  Changes in the pattern of human-capital acquisition lead to the changes in the supply of high skilled versus low skilled labour  These changes then erode the wage differentials  As long as human capital is costly to acquire, some wage differentials will persist in equilibrium  Discrimination in labour markets can also explain some wage differentials  Suppose Market E (elite) discriminates against a certain group while market O (ordinary) does not  The discrimination will force a flow of some labour from E to O markets  Wages will adjust in both markets, rising in the E market (decrease in supply), and lowering in the ordinary market (increase in supply)  The pursuit of profits generates economic forces that tend to reduce discriminatory wage differentials  Wage differentials in non-competitive markets:  Monopoly: a union in a competitive market  A labour union has monopoly power: it can change the supply of labour, driving up the wage.  Firms are generally able to choose the level of employment, once the wage is determined in negotiations  Once you ask for a higher wage, it acts like a binding price floor, and firms hire people where that new price intersects demand, so there are excess workers (unemployed workers)  To prevent this, the union may restrict entry, shifting the supply curve to the left (the firm will be unable to hire people from outside of the union, or you can’t be part of the union until you’ve worked in the field for a certain amount of time)  “Mono
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