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Restrictions in The Labor Market
Important cases of restrictions that are designed to
increase price occur in the resource market. Unionization is
one way that sellers in the resource market can restrict
sales to raise price. A union can negotiate a contract above
the wage the market would set. This possibility is shown
below where Pn is the negotiated wage and Pm
is the market wage. The firm agrees to this because the
alternative is a strike. If the firm could simply replace
striking workers with nonstriking workers (called
scabs by unionized workers), the threat of a strike
would have much less effect. But attempting to do this is
likely to cause violence and destruction. The surplus
indicated on the graph should show up as a large number of
applicants whenever the firm hires. Rationing can take place
on a first-come, first-served basis, on the basis of "who
you know," or on any other basis the firm and union
decide.
An alternative way to restrict transactions is to
restrict supply, an option that usually requires the
cooperation of the state. One way it can be done is with
licensing. If one cannot enter a profession without a
license, and if the number of licenses can be restricted,
then fewer people will enter the occupation. This method is
shown in the graph below where Supply 1 is the supply
curve without licensing and Supply 2 is the supply
curve with it. Among occupations that use this method (the
list varies from state to state) are teachers, most medical
professions, lawyers, accountants, beauticians, barbers,
morticians, and veterinarians.
For the use of resources to be efficient, their prices
must reflect the value that they could contribute elsewhere
in the economy. The price that a person using a resource
sees should be the opportunity cost of that resource. The
problem that licensing and union power cause is that they
generate prices that misstate the opportunity costs of
resources. When the cost of a resource that a decision maker
uses differs from its social cost (which is its opportunity
cost), decisions will be distorted and not economically
efficient. For example, if a union contract says that an
employer must pay Ian Segoe $10.00 per hour if he works for
it, and Ian will only add value of $9.00, the firm will not
hire him. Instead he must take a job that pays only $8.00
per hour. Because Ian's labor is not used where it adds the
most value, the economy is economically inefficient.
One might object to treating unions and professional
licensing in the same way that monopolies are treated. Many
people believe that labor unions aid working people and
licensing protects the public. They believe that the extra
wages that unions obtain for their members come from the
profits of big business, and without licensing, the public
would be exposed to charlatans. There is often some truth in
these beliefs, but not the whole truth.
Effective unions do raise the wages of their members. All
economists who have studied the data seem to agree on this
point, though they differ on how much unions raise wages of
their members relative to those not in unions, with
estimates ranging from 5% to 30%. These studies also suggest
that the increase in wages for union members has the effect
of pushing down wages in nonunionized sectors. The number of
workers employed in an industry with successful unions will
decrease. Thus, there will be more workers available in
nonunionized sectors, causing supply curves to shift to the
right. The equilibrium wage rate in the nonunionized sector
will be lower as a result of unions.1
Licensing may improve the quality of services, but at the
expense of reducing quantity. Hence, even if licensing
achieves its stated purpose of improving quality, it is not
necessarily true that the consumer is better off. The loss
of cheap, low-quality service may offset the higher quality;
would automobile drivers be better off if they could only
buy Rolls-Royce automobiles? However, there is also
considerable doubt on the part of some economists, based on
their reading of the data, that licensing does much to
improve quality.
Next we look at price
discrimination, a pricing strategy attractive to those
who can use it.
1 Economic theory may encourage
an underestimation of the value of unions because it focuses
on relationships of voluntary exchange, not on power
relationships. In a modern economy market relations have
been partially replaced by the hierarchical relations within
the large corporation. There is a potential for abuse in the
power relations that exist within the firm, and unions are a
way to respond to this. Unions are more likely to be formed
in organizations that have poor management-worker relations
than in those where management-worker relations are
harmonious.
Copyright
Robert Schenk
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