IRE244H1 Chapter Notes - Chapter 3: North American Free Trade Agreement, National Labor Relations Act, Ageism
10 Oct 2018
School
Department
Course
Professor
Chapter 3: Economic, Social and Political Environments
● The Economic Context
○ Macroeconomic Policy
■ Macroeconomic policy: policy that applies to economy-wide goals, such
as inflation, unemployment, and growth
■ Deregulation: policy designed to create more competition in an industry
by allowing prices to be determined by market forces
■ Privatization: transfer or contracting out of services to the private sector
■ North American Trade Agreement (NAFTA): free trade agreement
among Canada, the US, and Mexico that was signed in 1994 and
included a labor side agreement, the North American Agreement on
Labor Cooperation
○ The Labor Market
■ Labor Power and Marshall’s Conditions
● Product Market
○ The more competitive the product market, the greater the
employment impact of a wage increase and the elasticity of
demand for labor
○ Employment tradeoff: when a union increases wages, the
higher costs may be reflected in reduced sales
■ Reduced sales cause reduced demand for labor
○ Unions will tend to have more power when there is less
competition in the firm’s product market
○ Thus, to the extent that free trade increases market
competition, union power will be reduced
● Substitution Effect
○ The easier it is to substitute capital for labor the less power
labor will have to raise wages
○ The firm that can easily substitute other factors of
production for labor will possess more bargaining power
● Labor Intensity
○ Labor intensity is the degree to which labor costs account
for production costs
○ An industry is labor-intensive if labor costs are a high
proportion of total costs
○ The smaller the proportion of total costs labor is, the lower
the employment impact of a wage increase will be, thus
giving labor more power
○ In firms that are highly capital-intensive (e.g., high tech,
printing, aerospace), labor will have more bargaining
power because firms can absorb a wage increase without
a serious impact on total costs and employment
● Market for Substitutes
○ The more competitive the market for substitute factors of
production ism the greater the bargaining power firms will
have
○ The cheaper and more available these substitutes, the
greater the impact on employment, and hence the greater
the employer’s bargaining power
● To summarize
○ Demand is more inelastic and unions will have more power
when
■ Product markets are less competitive
■ Labor costs are a small proportion of total costs
■ The market for substitutes is less competitive
■ It is harder to substitute labor for capital
○ Supply of Labor
■ Population and Immigration
● Economic prosperity depends on labor force growth, which in turn
must rely on immigration because fertility rates are too low
■ Work-Leisure Decisions
● The impact of a wage increase on leisure is analyzed in terms of
substitution and income effects
● As our incomes rise, we mau substitute leisure for work because
more goods and services per hour of work. But higher incomes
make both leisure and work more desirable
● Noncompetitive and institutional factors
○ Noncompetitive factors
■ In economic theory, monopsony exists when a
firm is not a wage-taker but a wage-setter
■ Theory predicts lower wages and employment
levels in monopsonistic markets
○ Institutional barriers to supply
■ Labor supply may be inhibited by governments
through a lack of resources to training or higher
education, resulting in a restriction on the supply of
graduates to a given occupation or profession
○ Unions and labor supply
■ Craft unions’ control of labor supply through access
to apprentice programs and hiring halls (a union-
run center that refers union labor to job sites as
requested by firms) has positive and negative
effects
■ Apprenticeship training and hiring halls tend to
increase union productivity, while jurisdictional
disagreements and restrictive work rules lower it
● Demographic Factors
Document Summary
Macroeconomic policy: policy that applies to economy-wide goals, such as inflation, unemployment, and growth. Deregulation: policy designed to create more competition in an industry by allowing prices to be determined by market forces. Privatization: transfer or contracting out of services to the private sector. North american trade agreement (nafta): free trade agreement among canada, the us, and mexico that was signed in 1994 and included a labor side agreement, the north american agreement on. The more competitive the product market, the greater the employment impact of a wage increase and the elasticity of demand for labor. Employment tradeoff: when a union increases wages, the higher costs may be reflected in reduced sales. Reduced sales cause reduced demand for labor. Unions will tend to have more power when there is less competition in the firm"s product market. Thus, to the extent that free trade increases market competition, union power will be reduced.
