ECON 101 Lecture Notes - Lecture 19: Efficiency Wage, Market Power, Frictional Unemployment

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1 Nov 2016
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CH 15: Unemployment
1. Minimum-Wage Laws
The min. Wage may exceed the equilibrium wage for the least skilled or experienced
workers
2. Unions
Union: a worker association that bargains with employers over wages, benefits, and
working conditions
Unions exert their market power to negotiate higher wages
The typical union worker earns 20% higher wages and gets more benefits than a
nonunion worker for the same type of work
When unions raise wage above equilibrium, quantity of labor demanded falls and
unemployment results
“Insiders” – workers who remain employed, are better off.
“Outsiders” – workers who lose their jobs, are worse off.
Some outsiders go to non-unionized labor markets, which increases labor supply and
reduces wages in those markets.
Are unions good or bad? Economists disagree.
Critics: Unions are cartels. They raise wages above eq’m, which causes
unemployment and/or depresses wages in non-union labor markets.
Advocates: Unions counter the market power of large firms, make firms more
responsive to workers’ concerns
3. Efficiency Wages
The theory of efficiency wages: firms voluntarily pay above-equilibrium wages to boost
worker productivity
Different versions of efficiency wage theory suggest different reasons why firms pay high
wages
Four reasons why firms might pay efficiency wages
Worker health: in less developed countries, poor nutrition is a common problem.
Paying higher wages allows workers to eat better, makes them healthier, more
productive
Worker turnover: Hiring & training new workers is costly. Paying high wages
gives workers more incentive to stay, reduces turnover.
Worker quality: Offering higher wages attracts better job applicants, increases quality of
the firm’s workforce.
Worker effort: Workers can work hard or shirk. Shirkers are fired if caught. Is being fired
a good deterrent? Depends on how hard it is to find another job. If market wage is above
eq’m wage, there aren’t enough jobs to go around, so workers have more incentive to
work not shirk.
Explaining the Natural Rate of Unemployment: A Summary
Frictional unemployment
It takes time to search for the right jobs
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Document Summary

Wage may exceed the equilibrium wage for the least skilled or experienced workers: unions working conditions. Union : a worker association that bargains with employers over wages, benefits, and. Unions exert their market power to negotiate higher wages. The typical union worker earns 20% higher wages and gets more benefits than a nonunion worker for the same type of work. When unions raise wage above equilibrium, quantity of labor demanded falls and unemployment results. Insiders workers who remain employed, are better off. Outsiders workers who lose their jobs, are worse off. Some outsiders go to non-unionized labor markets, which increases labor supply and reduces wages in those markets. They raise wages above eq"m, which causes unemployment and/or depresses wages in non-union labor markets. Advocates: unions counter the market power of large firms, make firms more responsive to workers" concerns: efficiency wages. The theory of efficiency wages: firms voluntarily pay above-equilibrium wages to boost.

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