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 \setcounter{chaptercounter}{10}
  \refstepcounter{chaptercounter} \label{chap09}
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\pagestyle{fancy} \lhead[\ref{chap09}--\thepage]{}    \chead{Regulating Labor}   \rhead[]
{\ref{chap09}--\thepage} \cfoot{}
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\vspace*{\fill}

  \begin{center}
\begin{Huge}
{\bf \ref{chap09}: Regulating Labor}  \label{s09.0} \\

\end{Huge}





  \end{center}


\vspace*{\fill}
\begin{quotation}
\begin{Large}
 {\it ``The labourer is worthy of his hire." }
\end{Large}
 \end{quotation}

\vspace*{\fill}

\begin{center}
   \includegraphics[height=.8\linewidth]{fig09-worker.jpg}

  \end{center}


\vspace*{\fill}

{\small \hfill {\it  October 13, 2019}}\\
 


{\small \hfill  \url{http://rasmusen.org/g406/reg-rasmusen.htm}, erasmuse@indiana.edu}







%------------------------------------------------------
 \newpage



  \noindent
 {\bf \ref{chap09}.1:  Introduction}\label{s09.1}

   Buying and selling labor is one of the most heavily regulated transactions in the modern
economy.  There are regulations about minimum wages, unionization, leaves of absence for child care,
withholding of income taxes, collection of payroll taxes, unionization, racial discrimination, and
special arrangements for  handicapped workers. 

   The most important regulation idea that will come up in this chapter is the {\bf unfunded mandate}.  A mandate is a command (in Latin ``mandamus" means ``we command'').  Often when the government wishes to accomplish something but does not want to pay for it, it commands individuals or companies to do it as a condition of  being allowed to carry on with their employment or business. The potential for government failure is obvious: the government gets the credit for the action, but doesn't have to raise taxes. Yet there can be good reasons for unfunded mandates too, arising from market failures such as asymmetric information or externalities. 

  Before getting to employment regulation, though, let us    start by distinguishing between direct demand and
derived demand. {\bf Direct demand} is demand for a good that yields the buyer direct satisfaction,
while {\bf derived demand}  is demand for an input that is used to produce some other good. If you
hire somebody to clean your house, you have direct demand for the labor. If you hire somebody to
chop wood that you will sell, you have derived demand for the labor.


  Demand for labor is usually derived demand, so
  before we   analyze the effect of regulation, let us  think about how derived  demand   works.
Suppose a rug factory has two inputs, capital and labor. Instead of taking output, $Q$, as directly
under the control of the manager, think of output as a production function, $Q(K,L)$,  which  has
output increasing as capital  or  labor increase. We can write the factory's profit as
\begin{equation}
Profit = P(Q(K,L))\cdot Q(K,L) - wL - rK,
\end{equation}
where the rug price $P$ is now a function of $Q$ which is a function of $K$ and $L$, and the prices
of labor and capital are $w$ and $r$. The factory must choose $K$ and $L$ to maximize profit. In
choosing $L$ and $K$, it is indirectly choosing $Q$. Let us start with labor. Taking the derivative
with respect to $L$  and setting it equal to zero yields
\begin{equation}
\frac{\partial Profit}{\partial L} = \frac{dP}{dQ}\frac{dQ}{dL} Q(K, L)  + P(Q(K,L))\cdot \frac{dQ}
{dL}    - w= 0,
\end{equation}
so
\begin{equation}
 \left( \frac{dP}{dQ}  Q(K, L) + P(Q(K,L)) \right)  \frac{dQ}{dL} = w
\end{equation}

 The expression $\frac{dP}{dQ}  Q(K, L) + P(Q(K,L))$ is marginal revenue, the same expression we
found earlier in determining monopoly output. The expression $\frac{dQ}{dL}$ is the {\bf marginal
product of labor}, the extra output from adding extra labor. Thus, we can rewrite the equation as
\begin{equation}
  MR\cdot MPL   = w.
\end{equation}

  To maximize profit, the rug factory is increasing the amount of labor it uses until adding just a
little more, at cost $w$, would equal the increase in marginal revenue from the extra output that
the labor would produce. This rate of increase of revenue from hiring more labor is known as the
{\bf marginal revenue product of labor}.  If the output market is competitive, then $MR =P$ and
profit maximization requires the firm to increase its labor till the value of the extra output from
hiring more labor just equals the increase in the  wage bill.
 The same reasoning implies that
\begin{equation}
  MR\cdot MPK   = r,
\end{equation}
 which says that the firm will keep hiring capital till the extra revenue it generates just equals
the extra cost of buying the capital.


We will focus on labor, and on the labor-buying decision of a firm in a perfectly competitive
market. Thus, the equation for the optimal choice of labor, $MR*MPL=w$, becomes
\begin{equation}
  P\cdot MPL   = w.
\end{equation}

  Think about how this factory's demand for labor will change if $P$ or $w$ changes.  Start with an
essential fact: the marginal product of labor (MPL) falls as more labor is used. This is a
consequence of diminishing returns.  The MPL  is the rate of  increase in rug output   if the
factory increases $L$ but everything else stays constant, including $K$.  Increasing $L$ without
increasing $K$ leads to diminishing returns to labor, so the  MPL  falls as $L$ increases. Starting
with more  labor results in less value from further increases.

 Now we can think about what happens when the wage rises. For our equation to remain an equation,
either $P$ must rise or MPL must rise. The rug price $P$ is set by market supply and demand, so it
won't change. Thus, MPL must rise. We have seen that MPL falls as L increases, so  MPL  must
increase as L falls. Thus, the factory will hire less labor. When $ w$  rises, $L$ will fall so that
$MPL$ rises, keeping the equation true.

   We can go through the same thought process for the rug price, $P$.  If $P$ goes up, then to keep
the equation in balance either $w$ must rise or MPL must fall. Since $w$ is determined by the market
for labor, it doesn't change. Thus, the factory must make MPL fall, which it does by hiring more
labor.  When the price of output rises, the factory hires more workers.

  It is common sense that employment falls after the wage rises,    and that employment rises when
the price of rugs rises, but  this analysis gives some explanation for why   happens. It also helps
us understand what is going on when the market supply curve shifts. In basic supply and demand
analysis, an increase in the market wage shifts  the supply curve to the left, as shown in Figure
\ref{chap09}.\ref{fig09-supplyshift.jpg}. The shift  is
the direct effect of the increase in $w$ causing a decline in the derived demand for labor and thus
reducing rug output for a given level of the rug price. The result of the supply shift, however, is
to create an indirect effect. The price of rugs rises, which shifts out the derived demand for
labor. In the end, less labor is used, but not as much less as if the rug price had not
risen. 

 

%\begin{wrapfigure}[19]{l}{4in}
%\vspace{-18pt}
\begin{center}
 {\sc Figure \ref{chap09}.\ref{fig09-supplyshift.jpg} \\
Increasing the Wage Shifts Up the Rug Supply Curve } \\
\end{center}
\refstepcounter{figurecounter} \label{fig09-supplyshift.jpg}
 \includegraphics[width=3.8in]{fig09-1-supplyshift.png}
%\end{wrapfigure}


   Two goods are   complements if when the price of good 1 rises, quantity
demanded of good 2 falls. Capital and labor would be    complements    if  when capital
becomes more expensive, the quantity demanded of labor falls. That would be the case if  capital and
labor must be used in a fixed combination---say, in a ratio of one worker to one loom in weaving.  More commonly, capital and labor are more moderate complements, because when the amount of capital rises the marginal product of workers rises too, even at the initial amount of labor. 
 
 In other situations,  labor and capital are  
substitutes:   when capital becomes more expensive, employers shift away from it and increase their demand for labor. 
  Labor and
capital would be substitutes if when labor became more expensive, the factory shifts to using more
capital instead.  Or, labor and
capital could be
  independent goods:  when the price of capital rises that has no effect on employment. 
 


    The  derived demand curve is  important for the political features of  labor regulation.
Workers will of course want higher wages, though not wages so high that they   cut too drastically
into the quantity of labor demanded.  That is the same tradeoff the seller of any good faces.
Workers will also, however,  want higher prices for the goods their employers sell.  Higher output
prices increase the demand for labor, increasing both the wage and the quantity demanded.  Labor
unions are   supportive   of import tariffs that raise the prices of manufactured goods because they
know that their employers will produce more at the higher prices, increasing the demand for their
labor.  In turn, this will change the equilibrium in the labor market and increase the equilibrium
wage.

  Workers   like policies that reduce the cost of complementary inputs and increase the cost of
substitute inputs. If  materials are a complement and machinery is a substitute for labor, workers
will favor subsidies for materials and taxes on machinery.  Often the interests of different kinds
of labor conflict with each other. A  given job might take  one skilled typesetter the same amount
of time as two less-skilled typesetters, in which case the relative wages will determine which the
employer uses.

   All states have licensing requirements for   work in certain occupations.    Indiana  for
example,  requires licenses for  such  occupations
as acupuncturist, dentist, hearing aid dealer, nurse, accountant, home inspector, and
plumber.\footnote{``Professions,'' {\it In.gov}, State of Indiana,   
\url{http://www.in.gov/pla/boards.htm}.}
   The public-interest justification of such requirements is that they keep quality high, helping
the clients   by  overcoming the market failure of imperfect   information.  The requirements also,
however, have the effect of discouraging competition from unlicensed     workers who might have
lower quality but would   charge a lower price for their services.   Let's use plumbers as an example.    If we start from no regulation and impose a licensing requirement for plumbers, that will reduce supply, shifting the supply curve to the left because it is more costly to become a plumber. If the quality of plumbers rises, though, demand strengthens, shifting to the right, because customers are willing to pay more for a given amount of plumbing services. Whether surplus rises depends on which is stronger, the cost effect or the quality effect. If the market starts with no market failure, the cost effect will dominate. That is because customers would choose a plumber with a lower price even if his quality were lower. If the market has asymmetric information, however, then surplus could rise. As with  product quality regulation in general, imposing a minimum quality standard would raise surplus, so long as the government  chooses the standard correctly and does not impose higher quality than consumers really want.  



 \bigskip

\noindent
 {\bf \ref{chap09}.2: The Minimum Wage} \label{s09.2}

   One way to regulate labor is by direct regulation of its price.  In 1938 the {\bf Fair Labor
Standards Act} \index{Fair Labor Standards Act}(FLSA) established a federal minimum wage in the
United States.  Many states have set higher levels, which the act allows them to do.   It is illegal
to hire someone below the minimum wage, and while the employer will not go to jail,    he will have
to pay the employee back wages---even if the employee was complicit in being hired at a low wage---
and fines of up to \$1,100 per violation.\footnote{See ``Employment Law Guide,'' U.S. Dept. of Labor, 
\url{www.dol.gov/compliance/guide/minwage.htm}.}  


 
 
%\begin{wrapfigure}[19]{l}{4in}
%\vspace{-18pt}
\begin{center}
 {\sc Figure \ref{chap09}.\ref{fig09-minwage1.jpg} \\
A   Minimum Wage } \\
\end{center}
\refstepcounter{figurecounter} \label{fig09-minwage1.jpg}
 \includegraphics[width=3.8in]{fig09-minwage1.jpg}
%\end{wrapfigure}


 

 For most kinds of labor, the minimum wage has little or no  effect. If the minimum wage is set at
\$8.00 and the market-clearing wage is \$10.00, as in Figure \ref{chap09}.\ref{fig09-minwage1.jpg},
then the minimum wage will not end up increasing labor costs at all, and the quantity of labor
employed will be unaffected.

 Let's set up supply and demand equations for  Figure \ref{chap09}.\ref{fig09-minwage1.jpg} to show
the effect of a binding minimum wage.  Let the derived demand for labor by employers  be
\begin{equation}
 L^d = 30 - w
\end{equation}
and the supply by workers be
\begin{equation}
 L^s(w) =  \begin{cases}
 0  & \mbox{if }   w<5\\
  10 &\mbox{if } w=5\\
 10 + 2(w-5)& \mbox{if } w>5 \\
\end{cases}
\end{equation}

    To give you more practice with understanding supply, I've chosen an unusual labor supply curve to   illustrate  what happens when there is an   alternative use of labor.
The 
quantity of labor supplied is zero up to a threshold price, then jumps to  10 if the wage is \$5, and then rises linearly for higher wages.
This represents   a situation where many workers have an alternative use of their time  that
is better than a job in this labor market at  a wage of \$5. The alternative might be self-employment,   working in  some other labor market, or living on the aid of  government and
relatives.


 Equating quantity supplied and quantity demanded yields $30- w = 10+ 2(w-5)$ so $w = \$10$.
Setting a minimum wage of \$8 would have no effect. The quantity of labor hired would equal 20
either with or without that minimum wage.

  Since labor is a derived demand, it will shift back if   the price of output falls.  Recessions are the biggest cause of
reduction in the demand for labor. Aggregate demand falls, and so the prices  of goods fall, which in
turn causes the demand for labor to shift back.  Suppose there is a recession and the derived
demand for labor becomes
\begin{equation}
 L^d = 18 -  w
\end{equation}

Equating the quantity supplied of labor to the quantity demanded  yields $18- w= 10 + 2(w-5)$  which
solves to  $w= \$6$. A minimum wage of \$8 is now binding.

  At the equilibrium  wage of \$6   the quantity demanded of labor would be $L^d(w) = 18 -  w =
12$, which would equal the quantity supplied.  To find consumer surplus---which in this case means
surplus to the buyers of labor, the firms---we first need the wage at which derived demand falls to
zero. Derived demand falling to zero means   $L^d(w) = 0 = 18- w$, which implies $w=\$18$.  Thus,
the  employer  surplus at a wage of \$6 would equal $.5(18- 6) (12) =  72$. This   surplus would
compensate employers for the   fixed costs they had paid for their capital.

The producer surplus---which in this case goes to the workers, the suppliers of labor---would
equal  the rectangle of size (10)(6-5)=10 for their first 10 units supplied plus the triangle of
size .5(2)(6-5)=1 for  the last unit, which add up  to    a worker surplus of 11.

 Total surplus would be  83, the employer surplus of 72 plus the worker surplus of 11.

   Under the minimum wage of \$8,   quantity supplied would exceed quantity demanded. Quantity
supplied would be $ 10+ 2(w-5) =16$, but quantity demanded would be  $18-8= 10$.  The smaller of
these two labor quantities would be the amount of labor   actually hired, so $L=10$. Employer
surplus at this level of hiring would be  .5 (18-8) (10) = 50.

 To find the worker  surplus, we need to know what  wage  would elicit a quantity  supplied of 10
units of labor. That wage is \$5 in this case, but the workers are paid \$8. Thus, worker surplus
has risen to equal the rectangle of size (8-5)(10) = 30. Adding 50 in employer surplus to 30 in
worker surplus yields a total surplus of  80.

    Thus, we reach the typical result that a price floor---in this  case, a minimum wage---creates
deadweight loss by reducing the amount of trade.

    The minimum wage has led to  a drastic increase in the surplus of the workers. This provides
political and policy  motivation  for the minimum wage. As a group, minimum-wage workers are better
off. Like a group of firms, they would like to cartelize and raise the price, and here the
government is doing that for them, making it illegal to pay less than the cartel price.  Like firms
in a cartel, however, workers as a group   would not want the minimum wage set too high. Once the
wage is too high, a further rise in the  minimum wage     reduces surplus because it cuts too far
into employment. The ideal wage for workers would be found by setting worker marginal revenue equal to worker 
marginal cost. For workers, the marginal cost is the height of  their supply curve, which for small
quantities is flat at  \$5. The workers' marginal revenue is how the total amount of pay changes with the amount
of labor. It is found from the employers' demand curve in the usual way, except the quantity is of
labor and the price is the wage.
\begin{equation}
  MR = \frac{dR}{dL} = \frac{d }{dL} wL= \frac{d }{dL} (18-L)L = 18-2L
\end{equation}

 Equating MR and MC yields $18-2L = 5$, which solves to $L=6.5$. That quantity of labor will be
demanded by employers only if $w = \$11.50$, so our minimum wage of \$8.00 is well below what
maximizes worker surplus.

  Who else would want the minimum wage? Labor unions support higher minimum wages, even though their
members already earn well above the minimum wage. Cynics suggest that this might be because a higher
minimum  wage reduces the competitiveness of unskilled and skilled labor, which are substitutes.
There is a public-interest argument that motivates most supporters, though:
   minimum-wage workers earn much less than the average worker in the economy,   and one might think
they deserve more surplus than the market gives them. Though minimum-wage workers on average have
higher surplus after imposition of a minimum wage, however,  the amount of employment of unskilled
labor has declined, so some workers end up unemployed and lose what surplus they  would have had at
the  equilibrium wage. Which workers are these? Most likely, the ones newest to the labor market are
the ones who would lose. If a minimum wage is imposed, its most drastic effect will be on hiring of
new workers rather than on firing old workers. One concern is that the minimum wage will make it
less likely that young people acquire work experience. Some countries have {\bf subminimum wages}
\index{subminimum wages}for young people.   Ireland, for example,  has a normal minimum wage equal
to  \$11.94, but workers under 18 can be paid just 70\% of that and the minimum wages in the first
and second year of employment after age 18 are  at 80\% and 90\% to give employers incentive to hire
workers new to the labor force.\footnote{ \href{http://www.citizensinformation.ie/en/employment/}
{``Minimum rates of pay,''} National Employment Rights Authority, Ireland (July 25, 2011).}
 The idea of a subminimum wage is to encourage the hiring of young people who are less valuable to
the employer because of their lack of experience. In addition, teenagers are most likely to be
living with their parents,  and their family income might be well above the poverty line, so the
charitable motive for the minimum wage is weaker.

  The minimum wage also affects the surplus of employers and consumers. After a minimum wage is
imposed,
the higher wage will be passed on to consumers   through higher prices for the goods produced by
those workers.  In the short run, the burden will shared between consumers and employers, but  in
the long run more  or all of it will shift to consumers.


   A little discussion will be useful on this last point. Suppose the market for  fast food is
perfectly competitive  and all firms have the same cost curves. In the short run, the market supply
curve for fast food will be upward sloping, and the restaurants will absorb some of the increase in
costs once the minimum wage is imposed. In  the long run, however,  some establishments will close
down because they can't cover their fixed costs. Since all firms have the same cost curves, the
long-run supply curve will be perfectly elastic and producer surplus will be zero.  Firms will  be
earning zero economic  profit because they will just be earning back their cost of capital, and we
have assumed none of them has  a  cost advantage from  which it could earn a special return. Thus,
in the long run if the minimum wage  goes up, the increase in costs will be fully reflected in the
higher price   of fast food  to consumers.

 In the short run, which is most important for politics, more of the burden of a costly regulation
will be on the firm  and less on the consumer. Thus, even if the long run cost is entirely paid by
consumers, political opposition to the regulation will  come mostly from business. The  loss to
businesses is also more concentrated, and they  have trade associations to lobby for them.
Consumers may not realize that in the long run exit of businesses will shift more of the burden to
them. Rationally ignorant, they may not hear of the proposed increase, may not care enough to take
action, and may  not even understand that it would raise restaurant prices at all.


 \bigskip

\noindent
 {\bf \ref{chap09}.3: Employment Mandates}\label{s09.3}

 Many regulations can be viewed as  unfunded employer mandates, which require the employer to provide
something desirable to the worker---fringe benefits,   particular contract terms, or better working
conditions.  These could include minimum vacations,  severance pay,
health insurance benefits,   family leave,  a grievance process before firings, or ventilator masks
to prevent occupational diseases. The government rarely offers to pay for the mandates,  
which is one reason mandates are politically attractive.  A crucial   feature  
is  that unless the government simultaneously bans wage cuts,  the  employers are still free to set
wages at any level the workers will accept.   What the worker gains from the mandate he may lose
from a resulting pay cut.\footnote{The gains and losses also vary among different kinds of workers. See
\href{http://www.jstor.org/stable/2118071} {``The Incidence of Mandated Maternity Benefits,''}   Jonathan Gruber,
{\it The American Economic Review},  84:  622-641  (June  1994).}

 To see this, let us start by looking at  a voluntary fringe benefit.
  Suppose    employers are now  paying just cash but  are considering adding health insurance as a
fringe benefit.     Figure  \ref{chap09}.\ref{fig09-fringe1.jpg} shows supply and demand for labor,  
 with the equilibrium at $W_0$ and $L_0$. The new health insurance will affect both labor
supply and labor demand. The  effect on labor demand is that the employer must now pay  amount $x$
extra per worker on health insurance. The worker's usefulness to the employer does not change, so if
the employer was willing to pay  $W^d(L)$ in cash wages for $L$ workers before, he is now
willing to pay   $W^d(L)-x$ in cash wages.  The employer ends up paying out the
same amount,  whether it is all cash  to the worker or partly cash to the worker and partly cash  to
buy an  insurance policy. The demand curve for labor will shift down by
amount $x$.  


   Next consider the worker's side,  labor supply. Before, workers  required $W^s(L)$ in cash wages
  to supply   $L$  in  work hours. Now, the job has the extra benefit of  health
insurance, so they are willing to work for less cash. Let the value of
the health insurance be $y$ per worker. A worker who would work for $W^s$ before is now willing to
work for a lower cash wage, $W^s-y$. Hence, the entire supply curve shifts down, from $W^s(L)$ to $W^s(L)-y$.  




  The new equilibrium is where $W^d(L)-x$ and $W^s(L)-y$ intersect. If $x<y$, then the new equilibrium will be at a  lower wage  and   a greater quantity. To see that the quantity rises, first realize what would happen if $x=y$. Then both curves would shift down the same amount, so both of them would pass through the point $(L_0,  W_0-x)$. If $y> x$, however, the $W^s-y$ curve has shifted down  more than the $W^d-x$ curve, so the new intersection will be at a lower point on the $W^d-x$ curve than if $x=y$.  Since  the point is lower on the demand curve,  $L$ has increased.

\begin{center}
\begin{minipage}{.8\linewidth}
%\begin{wrapfigure}[16]{r}{3in}
%\vspace{-36pt}
\begin{center}
 {\sc Figure \ref{chap09}.\ref{fig09-fringe1.jpg} \\
Adding an Efficient Fringe Benefit } \\
\end{center}
\refstepcounter{figurecounter} \label{fig09-fringe1.jpg}
 \includegraphics[width=\linewidth]{fig09-fringe1.jpg}
 %\end{wrapfigure}
\end{minipage}
\end{center}

 Both employers and workers will be better off as a result of the change. Start with the employers. Their cost of labor has risen by $x$ per unit, which hurts them. The wage has fallen by more than $x$, however, so their cost per unit of labor has fallen overall. The amount of labor that they employ has risen, from $L_0$ to $L_1$. Thus, both the height and the breadth of the employe surplus triangle have increased, and they are better off.

How about the workers? As with employer surplus, $L_1>L_0$, so we just need to show that the new triangle has a greater height, i.e. that $ W_1+y>W_0$. That inequality is equivalent to $W_0-y < W_1$, which in words says the wage has  dropped by  a smaller amount than $y$.  To see that it has,  note that if  $L$ had not changed at the new intersection,   the wage would have dropped by exactly $y$. But $L$ has increased, so the equilibrium is further up the supply curve, and adding $y$ to the new equilibrium wage would attain a point on the old supply higher than $W_0$. Thus, the worker surplus triangle also has increased its width and height, and workers are   better off in the new equilibrium. The new fringe benefit helps everyone.

We assumed that the fringe benefit cost the employer less than it benefited the worker.  This assumption that  $x<y$ was crucial to the conclusion that the health insurance was helpful. To see that, look at Figure \ref{chap09}.\ref{fig09-fringe2.jpg}. Here, the health insurance costs the employers more than its value to the workers ($x>y$). As a result,  the employer  labor demand curve shifts in  more than the worker  labor supply curve shifts out. The result is that the new equilibrium has a lower level of hiring: $L_1<L_0$. This clearly diminishes the width of the surplus triangles, and   the height diminishes too, by the kind of reasoning we used earlier for the   $x>y$ case.

%\newpage
%\begin{wrapfigure}[20]{l}{4in}
%\vspace{-16pt}
\begin{center}
 {\sc Figure \ref{chap09}.\ref{fig09-fringe2.jpg} \\
An Inefficient Fringe Benefit } \\
\end{center}
\refstepcounter{figurecounter} \label{fig09-fringe2.jpg}
 \includegraphics[width=3.6in]{fig09-fringe2.jpg}
%\end{wrapfigure}

 What sort of things determine which is bigger, the cost $x$ to the employers of providing health
insurance or the benefit $y$ to the workers? Three things are most important. First, can the
employer buy or otherwise provide health insurance more cheaply than the worker? Second, does the
worker desire strongly enough to buy health insurance instead of the other goods he could pay for
with cash wages? Third, can the employer and worker manage to reduce the total amount both of them
pay in taxes to the government if the employer pays instead of the worker?

   In the case of health insurance, for most people the answers to these three questions support the
conclusion that $x<y$.  Employers can take advantage of economies of scale and their greater
sophistication to shop around for health insurance for their employees and buy it more cheaply than
the employees could. In addition, if the employer is large it may have market power and be able to
bargain with the insurance company for a better price.  Even more important, employer-provided
health insurance avoids  adverse selection. {\bf Adverse selection}\index{Adverse selection} is the
problem that it is the people who know they are unhealthy who try to buy the most extensive health
insurance. Knowing this, when insurance companies see an individual customer approaching them to
buy, they set  the price higher than when it is a plan for an entire company. They know that since
all employees of the company are getting the same insurance coverage, the insurance company is
getting more of a random sample rather than just the unhealthiest people as customers.   This does
mean there is something of a  difficulty with the second question for whether $x<y$---whether the
workers prefer health insurance to higher cash wages. A worker who is young and healthy might not
want to buy   health insurance or have his employer provide it with a reduced wage. But the health
insurance can at least be a good deal for the average worker.

 Health insurance also has an important tax benefit\index{tax benefit}: the company employing the
worker can deduct the health insurance premiums    as an expense, reducing its income tax. The
worker, however, does not need to count the premiums as income.

Let's look at a hypothetical in which the worker is currently using \$10,000 of his salary to pay
for health insurance.   The  worker must pay income tax on this before he can use what is left over
to buy health insurance.    If the worker's tax rate is 20\%, he is left with \$8,000. Though the
company pays out \$10,000,   the worker  is left with    only \$8,000 in health insurance.

 The company could reduce the worker's wage by \$8,500 (to imagine one possible scheme), buy the
same \$8,000 of health insurance the worker would have bought, and both would be better off.  The
company has saved \$500, because instead of the former \$10,000 in cash it paid the worker it is now
paying just \$1,500 in cash plus \$8,000 worth of health insurance. The worker still ends up with
the health insurance, plus he still  has  \$1,500 of the \$10,000 in cash income he used to receive.
He  has to pay the 20\% tax on that cash income, but he has \$1,200 left over that he can use to buy
other things.


  It might seem  that    to  attain value maximization the government should   calculate whether $x>
y$ or $y>x$ and then   require health insurance or not depending on the result. That neglects the
role of profit maximization. Companies    will offer health insurance  voluntarily under the very
conditions the government would be trying to calculate.      As we have seen, if $y>x$, so the
benefit to the worker is greater than the cost to the employer, it will be to their mutual benefit
to reduce the cash wage in exchange for  health insurance.  You could think of it as two separate
transactions: first the employer   hiring the worker and  second agreeing to sell him health
insurance.  If the cost to the employer is less than the benefit to the worker  there are gains from
trade available  and we expect the trade to take place at some price. If there were just one worker
and one employer, it would be a bargaining problem, where they might arrive at a price halfway
between $x$ and $y$ that would split the gains equally, or, if their bargaining abilities were
different, some other price that would split the gains unequally. If there is a  perfectly
competitive market for labor, then we have seen in the graphs   what the result  will be---a
splitting of the gain, where the amount of the split depends on the elasticities of supply and
demand. Even if there were just one employer, he would offer the efficient fringe benefit, since
that would help him to reduce his expenditure on labor. If he offers the fringe benefit, he can
offer $y$ less in cash wage, and if $x<y$ that will be profitable for him.

     In actuality, some firms offer health insurance   and some do not. Why?  Presumably some don't
because $x$  is not always less than $y$. In particular, even if health insurance is tax advantaged,
some workers will prefer cash. A worker is married to someone with family health insurance already,
or his  income might be low enough that he wants the cash for immediate expenses and is willing to
accept the risk of illness. We see tremendous variation in fringe benefits and working conditions
between companies because of variation in worker preferences. Some people prefer high pay but long
hours; others are willing to forgo  high pay in exchange for a more relaxed workplace.  Leaving such
things to the marketplace   lets different preferences be satisfied.

   Mandatory employer-provided health insurance  is required by state law in Massachusetts---
Romneycare, as it is often called after the governor who passed it. In 2010 it also became federal
law, with the {\bf Affordable Health Care Act} \index{Affordable Health Care Act}(Obamacare).
Firms that employ over 50 workers  are required to provide health insurance plans that cost less than  9.5\% of the employee's income. If the
 firm does not provide insurance, it is fined   and the worker may buy government-subsidized insurance from an outside company.

  Most companies offered health insurance benefits already even before the ACA: 69\% of employers with three or more
workers, 90\% of those with 25-49, 95\% of those with over 50, and 99\% of those with over
200.\footnote{``Employer Health Benefits: 2008 Summary of Findings," Kaiser Family Foundation, p.4,
\url{http://ehbs.kff.org/images/abstract/7791.pdf}.} Why  impose a  mandate to make them do what
they were doing already? Partly it is to force the minority that do not offer benefits now to offer
them. Another reasons, though, is that for lower-income workers another feature of the act,
government-subsidized outside plans, would make the worker's benefit $y$ from employer-provided
insurance decline. The subsidy makes the outside plan cheaper for employees so their value for the
fringe benefit declines, and if $y$ declines below $x$ then employees and employers will shift to
less insurance and greater cash wage. When the employees shift  to the government-subsidized plan,
however, that  raises government expenditure, which the act is trying to avoid.

   Employer mandates can create another unexpected distortion if they create a fixed cost per
worker: substitution between full-time and part-time workers.   The  ACA requires employers with over 50 employees to provide health insurance for any worker who works more than 30 hours per week, and   it seems that  employers have cut back on the hours of part-time employees who were working more than that number of hours.  







\bigskip
  \noindent
 {\bf \ref{chap09}.4: Market Failure  and   Workplace Safety}\label{s09.4}


  What we have worked through   is the idea that if some feature of employment such as the fringe
benefit of health insurance  benefits the worker more than it costs the employer, that feature will
be voluntarily adopted, to the  benefit of  both parties.
  The principle can be applied to   many aspects  of pay and the workplace. Employers grant vacation
time without a government mandate, though some companies offer less than others. Employers install
air conditioning  partly to make their workers more productive but also because they know they would
have to pay extra wages if working conditions were worse. Some employers provide pension plans and
some do not, based on whether they think their workers would prefer their compensation as pensions
or as immediate cash.  It is not clear why the government needs to impose mandates for any of these
things.

Where, then, might regulation be justified? We must look for possible market failure. Market power
is not likely to be important, since  even monopoly employers   have   incentive to give their
workers good working conditions and efficient fringe benefits---though only because the monopoly
can then reduce wages accordingly. Externalities could possibly  matter. One argument for mandatory
health insurance is that if a  worker does not have health insurance   he will take advantage of
free medical care under government programs or charity. Requiring him to take part of his pay in
health insurance means he will be less of a burden to the government.

   Most often, however, it is not market power or externalities that are used to justify labor
regulation, but  asymmetric information and paternalism. Suppose, for example, that  the employer-
provided benefit in something hard to value--- equipment that causes fewer workplace accidents,  or
low levels of exposure to chemicals. These are like health insurance because they are costly to the
firm but helpful to the workers. If the firm pays an amount equal to $x$ per worker, it  confers an
advantage of $y$ per worker, with $x<y$. If the worker does not realize  what the firm has done,
and the firm cannot persuade the workers of the safety feature's value,
 the firm  will not be able to  reduce the cash wage enough to make  adding the safety feature
profitable. In that case, value would be created if the government required firms to install those
features.

    For consumer products, the main problem created by asymmetric  information  is  buyers who
cannot accurately tell the seller's quality. For labor, that problem is still   important. Employers
cannot tell individual workers' talent or honesty in advance, so workers get
misallocated\index{misallocated} to jobs not appropriate to their talents.

    For labor, however, there is also a problem of the seller (the worker) not knowing his true cost
of working for the buyer (the employer).   In the 1910's and 20's, the   U.S. Radium Corporation
employed women to paint a mixture of glue and radium onto the dials of watches, clocks, and various
instruments of measurement so that they would glow in the dark.  Radium is  not only highly
carcinogenic but can cause death by radiation poisoning.  The managers knew  something  of the
dangers, though not as much as we know today, since radium paint was used on a large scale during
World War I without drastic consequences. Company scientists   used lead shields and handled the
radium powder with tongs, but the workers knew nothing of the risk. They didn't worry about getting
paint on their skin, they painted their nails with radium for fun, and the company even instructed
them to    lick  their brushes to shape the points.   After four suspicious deaths,   the Consumer's
League, a nonprofit organization  that devoted itself to reporting on child labor and workplace
hazards investigated. In 1924 it published a report on the danger  of work in the industry. Some of
the women brought lawsuits, which received national attention (though they settled out of court).
The factory's dangerousness was particularly reprehensible because the radiation poisoning, if not
the cancer danger, could have been prevented by even a small amount of shielding.  Even gloves can
block alpha rays, which are potent but easy to stop, though the carcinogenic gamma rays are
not.\footnote{Kovarik, Bill \index{Kovarik}, {\it The Radium Girls},   originally published as Ch. 8
of {\it Mass Media \& Environmental Conflict} with Neuzil,\index{Neuzil} Mark, Sage Publications
(1996), \url{http://www.radford.edu/~wkovarik/envhist/radium.html}.}

 
%\begin{wrapfigure}[18]{l}{3in}
%\vspace{-16pt}
\begin{center}
 {\sc Figure \ref{chap09}.\ref{fig09-osha1.jpg} \\
Unperceived Danger in the Workplace---Perfectly Elastic Demand } \\
\end{center}
\refstepcounter{figurecounter} \label{fig09-osha1.jpg}
 \includegraphics[width=2.8in]{fig09-5-unperceived-danger.png}
%\end{wrapfigure}

To analyze asymmetric information, we'll start with  Figure \ref{chap09}.\ref{fig09-osha1.jpg},
which  shows an industry in which demand for labor by employers is perfectly elastic, pinning down
the wage at $w^*$.  Workers do not realize the dangers of  radium in the workplace  and their labor
supply is given by the outer supply curve, $S_{informed}$. If they knew the truth about the dangers
of the workplace,   they would insist on higher wages and the supply curve would be  $S_{informed}$.
The two curves $S_{uninformed}$ and  $S_{informed}$ are like the demand curve and the value curve.
The curve $S_{informed}$, the informed labor supply curve,  represents the true cost to the workers
of taking this job. Since workers use the uninformed supply curve in deciding how much to work, the
equilibrium will be at $L_{uninformed}$  and  $w^*$.

The employer  surplus in equilibrium is zero because demand is perfectly elastic, so there is no
area above the price and below the demand curve.  The worker surplus is A-C, which is actually
negative. The workers think they are earning surplus A+B, but if we look at their true costs of
choosing this job, as shown by the informed supply curve, the wage is less than the cost for workers
on the supply curve  beyond quantity $L_{inf}$. Only too late do workers realize that their wage
does not justify the risk.




 Figure \ref{chap09}.\ref{fig09-osha2.jpg} goes through the same analytic process, but with the
demand curve sloping downwards  so there will be positive employer surplus.  Again, the equilibrium
wage and employment is where the employer demand curve intersects the uninformed worker supply
curve:    ($S_{uninformed}$, $W_{un}$). Employer surplus is  A+B+E+F, which is the amount employers
would have been willing to pay over the  equilibrium wage they do pay.  Worker surplus is  C-E-F-H.
Only area C is below the wage and above the supply curve. Areas E+F+H are subtractions for
quantities where the worker's true cost is above the wage $W_{un}$; it is the area above the wage
and below the supply curve. Adding employer and worker surplus, we get    A+B+C-H as total surplus.

  Workers believe they are getting surplus of C+D+G.  They indeed are earning areas D+G as part of
their total take-home pay  but those areas are not surplus, because they only give partial
compensation for true the costs of those workers between $S_{informed}$ and $S_{uninformed}$.

  If the workers became informed, they would supply  only $S_{informed}$ and the wage would rise to
$W_{inf}$. Both of these changes would cut into employer surplus, which would only equal A. Worker
surplus is B+C. Total surplus is A+B+C, so the area $H$ is the deadweight loss from excess provision
of labor under asymmetric information.

 \newpage
%\begin{wrapfigure}[18]{l}{3in}
%\vspace{-16pt}
\begin{center}
 {\sc Figure \ref{chap09}.\ref{fig09-osha2.jpg} \\
Unperceived Danger in the Workplace---Moderately Elastic Demand } \\
\end{center}
\refstepcounter{figurecounter} \label{fig09-osha2.jpg}
 \includegraphics[width=.8\linewidth]{fig09-6-danger-elasticsupply.png}
% \end{wrapfigure}
 

   Merely  requiring the release of  safety information  is the obvious regulation to solve the
market imperfection here. This is easier said than done, however. If     employers  knows  the risks
better than  the government,  the regulator  must incur costs to monitor and discover which
employers are being truthful.   Moreover, even if the information is given to them, workers must be
able to understand it. The question then becomes whether the government is willing to  override the
worker's decision that he is willing to accept the danger. The worker may rationally want to leave
the decision as to whether a safety measure is efficient in the government's hands, since he knows
less and even if he did know it would be hard as an individual to see if the company was in
compliance.


\begin{wrapfigure}{L}{3.4in}
\noindent
\begin{boxedminipage}[c]{\linewidth}
\refstepcounter{sidebarcounter} \label{sidebar04-4}
\begin{footnotesize}
\noindent
 {\sc Box \ref{chap09}.\ref{sidebar04-4} \\
  Compensation Schedule,  U.S. Code,  \S 8107(c), Chapter 81 of Title 50} (in weeks of  wages) \\

    (1) Arm lost, 312 weeks    \\
    (2) Leg lost, 288 weeks   \\
    (3) Hand lost, 244 weeks   \\
    (4) Foot lost, 205 weeks   \\
    (5) Eye lost, 160 weeks   \\
    (6) Thumb lost, 75 weeks   \\
    (7) First finger lost, 46 weeks   \\
    (8) Great toe lost, 38 weeks   \\
    (9) Second finger lost, 30 weeks   \\
    (10) Third finger lost, 25 weeks   \\
    (11) Toe other than great toe lost, 16 weeks  \\
    (12) Fourth finger lost, 15 weeks   \\
    (13A) complete loss of hearing of one ear, 52 weeks   \\
    (13B) complete loss of hearing of both ears, 200 weeks   \\
    (15) Compensation for loss of more than one phalanx of a digit is the same as for loss of the
entire digit. Compensation for loss of the first phalanx is one-half of the compensation for loss of
the entire digit.\\
    (17) Compensation for loss of use of two or more digits, or one or more phalanges of each of two
or more digits, of a hand or foot, is proportioned to the loss of use of the hand or foot occasioned
thereby.

\end{footnotesize}
\end{boxedminipage}
\end{wrapfigure}


      The old way to deal with workplace safety was  the tort system, as happened in the radium
cases of the 1920's.   Just as in the case of unsafe consumer products, the worker whose health was
hurt  could sue his employer.  In the workplace, however, strict liability would impose too much of
the cost of good health  on the employer and too little on the worker. When a worker spends much of
his life in a particular job, the influence of workplace on health is hard to untangle with the
influence of home life.  Workplace accidents are easy to connect with work but they can be caused by
worker carelessness as well as by employer negligence.  For that reason, accidents   are covered by
{\bf workers' compensation}\index{workers' compensation} plans (also known as {\bf workman's
compensation}\index{workman's compensation}). This is a form of mandatory insurance. The details
differ from state to state and there is also a plan for federal workers, but the idea in all of them
is that employers must pay premiums into a fund that compensates workers for both the health cost of
the accident and the wages they will lose because of the disability. The compensation is not
flexible and individualized, as in the tort system; it uses a fixed schedule for payments, as shown
in  box  \ref{chap09}.\ref{sidebar04-4}.  The purpose  of establishing the  workman's compensation
system was to replace the tort system with a cheaper and quicker method of compensating workers, so
generally a worker is not allowed to sue his employer in tort after a workplace injury.\footnote{A separate source of support for people who have worked for a long enough time and become disabled for some reason is Social Security Disability Benefits. The number of people receiving these has greatly expanded in recent years. See   David Autor \href{http://economics.mit.edu/files/7388}{
``The Unsustainable Rise of the Disability Rolls in
the United States: Causes, Consequences, and
Policy Options,''}
 (2012).}


 


 Protection against  risks underestimated by workers  is the justification for the {\bf
Occupational Safety and Health Administration\index{Occupational Safety and Health Administration}
(OSHA)\index{OSHA}}, created in 1970. Initially, OSHA used {\bf design-based standards}
\index{design-based standards}that would specify the exact design of equipment---the width of
ladder steps for example.
  OSHA later shifted more  to {\bf performance-based   standards}\index{performance-based
standards} which specifies a minimum level of performance or safety. Under a performance-based
standard,   a ladder might be required to be able to bear a certain weight without breaking. The
problem with design-based standards is that while they give clear direction to employers, they are
too rigid.   Safety is the objective, not  a particular design. The design OSHA chooses might well
be less safe or more costly than some other design  that currently exists  in the marketplace or
that might be developed. In addition, design-based standards stifle innovation, since any new
product would have to be incorporated into the standard before it could be used.

   OSHA has also changed its attitude towards cost-benefit analysis. OSHA's authorizing statute
tells it to protect worker health and safety whenever feasible and affordable. This was usually
interpreted as meaning that the regulation would not put the firm out of business, rather than that
the  benefits would exceed the costs. Marginal analysis was not used to develop standard to where
the marginal cost of a stricter standard started to exceed the marginal benefit of extra safety.
This policy was challenged in court, but the Supreme Court ruled in
{\it American Textile Manufacturers Institute, Inc. v. Donovan},
452 U.S. 490 (1981), that  OSHA was not required to balance costs against benefits. The Supreme
Court did  say that while OSHA was not required to trade off costs and benefits, it was at least
permitted to do so.    President Reagan issued Executive Order 12291 in 1981 to tell OSHA to do
that, and it has been part of general executive policy since then.

     One reason OSHA started by emphasizing design    is that it is easier to monitor than
performance. OSHA's budget is \$558 million, but that can only pay for    2,200 inspectors. Since
there are more than 8 million workplaces and 130 million workers around the nation, this means there
is 1 inspector for every 59,000 workers.    OSHA did 41,000 inspections in 2010.  States may choose
to enforce OSHA regulations using state agencies instead, with OSHA funding and oversight and 24
states have chosen to do so. In 2010 there were 57,000 inspections by state government
agencies.\footnote{``Commonly Used Statistics,'' OSHA,
\url{http://osha.gov/oshstats/commonstats.html}.}  That helps, but with so many workplaces, the main
impact of OSHA may be in setting safety standards which workers can look at to assess their
employers' performance and use to complain to OSHA if they see noncompliance.

 
\newpage
%------------------------------------------------------
\bigskip
  \noindent
 {\bf \ref{chap09}.5:  Unions}\label{s09.5}

 Many workers organize into unions, joint associations for bargaining with employers over wages,
fringe benefits,  and working conditions. Unions are regulated by the {\bf National Labor Relations
Board}\index{National Labor Relations Board}, created in 1935 by the  {\bf National Labor Relations
Act}\index{National Labor Relations Act} (or {\bf Wagner Act}\index{Wagner Act} after the senator
who sponsored it). The purpose of this act was to make it easier for workers to organize and sustain
unions. Its central feature is that if a majority of workers at an establishment vote to be
represented by a union then the management must {\bf bargain in good faith}\index{bargain in good
faith} with the union about a list of subjects that includes wages, hours, vacation time, insurance,
and safety practices. Bargaining in good faith is very difficult to define. The employer does not
have to grant any concessions to the union, but he must actively meet with it  and show signs that
he is open to agreement if the parties can come up with some new set of terms for the contract. If
one  party   thinks the other is not bargaining in good faith, he can go to the National Labor
Relations Board and file a complaint. The NLRB will issue a ruling which can be appealed to a
federal court. An example is the case of         {\it Radisson Plaza Minneapolis v. NLRB}, 987 F.2d
1376  (8th Cir.
1993), where the court found that Radisson had not bargained in  good faith because it unilaterally
changed wage and benefit schedules, cancelled meetings with the union, cut other meetings short,
engaged in discussion on irrelevant matters that wasted time, and made obviously unacceptable
proposals.  Other cases have found bargaining in bad faith when the employer's representative was
unprepared, when the employer made a take-it-or-leave-it\index{take-it-or-leave-it} offer, when the
employer would only agree to two meetings per month, and where the employer pleaded  inability to
pay but would not back the claim up with facts.\footnote{See Keith N.
Hylton,\index{Hylton}  ``An Economic Theory of the Duty to Bargain,''
 {\it Georgetown Law Journal}, 83: 19--78 (1994-1995), especially footnote 16.}

If the employer and the union do not come to an agreement, the    employer can declare an {\bf
impasse}\index{impasse} and implement the last offer made to the union. The union can then go on
strike, refusing to work until agreement can be reached on a new contract. This is risky for the
workers, because under   the {\bf Mackay Doctrine}\index{Mackay Doctrine}, the employer may hire
permanent replacements for the striking workers.\footnote{ {\it NLRB v. Mackay Radio \& Telegraph
Co.}, 304 U.S. 333 (1938). Thomas C. Kohler\index{Kohler}   \& Julius G.  Getman\index{Getman}  ``The
Story of NLRB v. Mackay Radio \& Telegraph Co.: The High Cost of Solidarity,''
 in {\it Labor Law Stories}, Laura J. Cooper and  Catherine L. Fisk, eds., Foundation Press, 2005.
} Although the Wagner Act forbids  an employer from firing a worker because he goes on strike, it
only requires the employer to give preference in case of vacancy to workers replaced during a
strike. Thus, if the employer can find replacements, the worker may well not get his job back even
if the strike does end.


 Much of what the NLRB does is to rule on cases of
 {\bf unfair labor practices}\index{unfair labor practices}. Examples
are:\footnote{\url{http://www.nlrb.gov/rights-we-protect/employerunion-rights-obligations}.}
\begin{itemize}
\item Threatening employees with loss of jobs or benefits if they join   a union.

\item
  Threatening to close the plant if  the employees vote to unionize.

 \item
  Transferring, laying off, firing,  or assigning  more difficult work tasks to employees active in
the union.
\end{itemize}

 Actions of employees can also be unfair labor practices:
\begin{itemize}

\item
  Picket line misconduct during strikes,   such as threatening, assaulting, or barring non-strikers
who want to enter the establishment.

\item
  Striking over issues unrelated to employment.

\item
 Refusing to process the grievance complaints of a worker because he disagrees with union officials.
\end{itemize}

  The other major  bill that regulates unions besides the Wagner Act is the {\bf Taft-Hartley Act}
\index{Taft-Hartley Act} of 1947. This was passed by a more conservative Congress than the Wagner
Act and was meant to roll back the power of unions. It added new unfair labor practices such as
unions organizing boycotts by the public of the employer's product. These are {\bf secondary
boycotts}\index{secondary boycotts}, thus called because it is not a boycott by the immediate union
involved but by other people or unions whom they recruit to help.  The act's  most important
provision, however, was that it outlawed the {\bf closed shop}\index{closed shop}: a labor contract
in which the employer agrees to hire nobody but existing members of the union. Moreover, it allowed
state-by-state decisions on whether to allow contracts which required any workers hired by a
unionized employer to either join the union or pay union dues while remaining a non-member. State
laws forbidding this kind of contract are known as {\bf right-to-work}\index{right-to-work} laws.

Right-to-work laws make it harder for unions to organize and succeed. A problem for a union, like
for a cartel, is to prevent free-riding. The ideal for a worker is to work in a unionized firm with
high wages but to remain out of the union so as to avoid paying union dues or having to go on
strike. Contracts requiring non-members to pay union dues anyway help solve this problem. Right-to-
work laws require firms to be {\bf open shop}\index{open shop}, not requiring non-members to pay
union dues. This  reduces the funding base of the union. Figure \ref{chap09}.\ref{fig09-right.jpg}
shows which states  have such laws (note that it was drawn before Indiana passed a right-to-work law
in 2012).

%\vspace*{24pt}
\begin{center}
 \begin{minipage}[c]{.8\linewidth}
\begin{center}
 {\sc Figure \ref{chap09}.\ref{fig09-right.jpg} \\
\href{http://www.nrtw.org/rtws.htm}{Right-to-Work States}} \\
\medskip
\refstepcounter{figurecounter} \label{fig09-right.jpg}
 \includegraphics[width=\linewidth]{fig09-right.jpg}
\end{center}
 \end{minipage}
\end{center}
% \vspace*{24pt}

  The controversy over unions is whether they simply raise the wages of some workers or contribute
to productivity by improving company operations and by enforcing labor contracts.
 The Clayton Act of 1914 exempts labor organizations from the anti-trust laws and  permits   groups
of workers   to jointly bargain with employers. Thus, as in Figure \ref{chap09}.\ref{fig09-
right.jpg}, perfectly competitive workers who initially earned $w_0$ as the result of supply and
demand could  organize into a union that would raise the wage to $w_1$. This would reduce hours
employed from $L_0$ to $L_1$, since the employer would not demand so many hours of labor at the
higher wage, but it would raise the worker's producer surplus from F+D+E to F+D+B. The employer
surplus would fall from A+B+C to just A, and area C+E would be deadweight loss, the usual   loss
triangle from the exercise of market power.

   In choosing $w_1$, the union would use the same procedure as a monopoly of a consumer product. It
would determine the  employers'  marginal revenue curve and find the quantity where MR=MC. In this
case, the supply curve is used for the marginal cost curve, since it represents the workers'
opportunity cost of working extra hours.


%\vspace*{24pt}
\begin{center}
 \begin{minipage}[c]{.8\linewidth}
\begin{center}
 {\sc Figure \ref{chap09}.\ref{fig09-unions1.jpg} \\
A Union Using Market Power} \\
\medskip
\refstepcounter{figurecounter} \label{fig09-unions1.jpg}
 \includegraphics[width=\linewidth]{fig09-unions1.jpg}
\end{center}
 \end{minipage}
\end{center}
% \vspace*{24pt}

    Special-interest problems also arise. Unions routinely bargain over  the contract's procedures
for dealing with workers who do poor work. The workers most likely to care about those procedures
are those   who think they might do  poor work, and they will lobby for procedures to make
discipline more burdensome for the employer even if the union must offer wage concessions in return
for concessions on procedures.\footnote{A good survey of estimates of the effect of unions on
productivity is Barry  Hirsch,\index{Hirsch}  ``What Do Unions Do for Economic Performance?'' {\it
Journal of Labor Research,} 25: 415--455 (Summer 2004). }

Labor unions have diminished in importance in the United States since 1960 and they cover very
different industries than they used to.\footnote{A convenient reference is: Alejandro Reuss,
``What's Behind Union Decline in the United States?'' {\it EconoFAQs}   (March 31, 2011)
\url{http://www.dollarsandsense.org/archives/2011/0311reuss.html}.}  In 1985, 20.5\% of workers were
covered by union agreements, of which  12.4 million were in the private sector and 6.9 million were
in the public sector.   By 2010 the figure had fallen to 13.1\%, of which 7.9 million were in the
private sector and 8.4 million were in the public sector. Only 7.7\% of private-sector employees are
covered by unions, but 40.0\% of public-sector employees are.\footnote{\href{http://www.census.gov/compendia/statab/2012/tables/12s0664.pdf} {``Table 664. Labor Union Membership by Sector: 1985 to 2010,''} {\it  The Statistical Abstract of the United States 2012}. }
 

One explanation for the decline of unionization is that employment in  basic industries such as
manufacturing and mining has  diminished over time in the United States whereas employment in
services and government has risen. Unionization\index{Unionization} played a part in that decline,
since it made products in unionized industries relatively more expensive and hence less attractive
to consumers. Increasing international trade   also played a part. This is partly because foreign
labor would be cheaper even in the absence of unions in America, but unions increased the labor cost
disadvantage of domestic production even more. Not only has manufacturing employment shrunk,   but
the percentage of U.S. manufacturing that is unionized has shrunk, which is perhaps a sign that
union productivity gains are not big enough for unionized firms to be able to compete well against
non-unionized firms.

  On the other hand, public-sector\index{public-sector} unions face much lower  competitive
pressures. If unionization raises the cost of the Social Security Administration\index{ Social
Security Administration}, it will not lose business to a competing agency. Competitive pressure is
not entirely absent, to be sure. Teaching in public schools is   heavily unionized, but parents may
resort to non-unionized private schools if union-negotiated procedures   make it too difficult to
remove bad teachers. When enrollment in the public schools declines, so do   state education
budgets. Public-sector unions, however, are in a powerful position because their employer, the
government, has a big advantage over private competitors, including being able to ban them from
competition.  Public-sector unions are  regulated differently, which does restrain their power. They
often do not have the right to strike; policemen may not go on strike, nor may federal
workers.\footnote{5 United States Code 7311, \url{ http://www.law.cornell.edu/uscode/5/7311.html}.}
Even unions that may strike, such as teachers' unions, rarely do. Rather, much of their purpose is
political lobbying. Public-sector unions are highly influential in state politics, as sources of
votes, information, campaign workers, and   contributions made by their political action committees.
Of the top 20 political action committees for federal contributions, 5 were unions, almost as many
as the 7 corporations.\footnote{The 5 unions were those for electrical workers, teamsters,
machinists, sheet metal workers, and air controllers, {\it Opensecrets.org}, ``Top 20 PAC
Contributors to Candidates, 2011-2012,'' \url{http://www.opensecrets.org/pacs/toppacs.php?cycle=
2012&party=A}.} Thus, the role  of unions in America today is very different  from in the
past.\footnote{Unionization has also been in decline in the United Kingdom, Germany, and Italy. See  John T.
Addison\index{Addison}, Alex
Bryson\index{Bryson},  Paulino Teixeira\index{Teixeira},  and Andr. Pahnke\index{Pahnke},   \href{http://www.politiquessociales.net/IMG/pdf/dp4760.pdf} {
``Slip Sliding Away:
Further Union Decline in Germany and Britain,''} IZA discussion paper, Bonn
(February 2010). }



 %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%

\bigskip
\noindent
{\bf \ref{chap09}.6:  Concluding Remarks }\label{s09.6}

  This chapter has left many aspects of labor regulation untouched. I have not discussed the
requirements that employers collect Social Security and Medicare taxes,   unemployment insurance,
workmen's compensation,   discrimination law,  sexual harassment law, and the Americans with
Disabilities Act.  I chose an assortment of the most important regulations, with a special eye to the idea of unfunded mandates.  


 %-----------------------------

\vspace{48pt}



 

%\cleardoublepage

\begin{center}
{\sc   Review Questions }
\end{center}
 \begin{enumerate}
\item
 How do changes in the price of output and the price of other inputs affects a firm's demand for
labor?
\item
  How does the minimum wage affect labor markets?
\item
  How do government-mandated fringe benefits affect labor markets?
\item
  How can asymmetric information make regulation of the labor market use-
   ful?
\item
  What is OSHA and how does it use design-based and performance-based
   standards?
\item
  How does the law constrain relations between companies and unions?


 \end{enumerate}





    \vspace{.2in}
%\cleardoublepage
\begin{center}
{\sc Readings}
\end{center}
 \begin{enumerate}

\item
 \href{http://www.wsj.com/articles/SB10001424127887323476304578197520954865406} {``Minimum Wage for Interns? It Misses the Point,'' } {\it The Wall Street Journal}.


\item
\href{http://www.forbes.com/sites/dandiamond/2015/01/13/obamacares-impact-companies-cut-hours-for-part-time-workers/#6f1b84054ab6} {``Companies Are Cutting Part-Time Workers' Hours. Blame Obamacare?''}  {\it Forbes}.
 

 
\item
   \href{http://healthblog.ncpa.org/the-6-an-hour-min-wage/}{``The \$6-an-Hour Health Minimum Wage,'' } John Goodman, {\it National Center for Policy Analysis Health Policy Blog}.




\item
   \href{http://www.forbes.com/sites/susanadams/2013/10/04/why-should-stage-hands-at-carnegie-hall-make-400000/#7998b0bb2ca4}  {``Why Should Stage Hands At Carnegie Hall Make \$400,000?,'' } Susan Adams, {\it Forbes}.

  


\item
\href{https://www.washingtonpost.com/opinions/a-license-to-be-a-florist-how-occupational-rules-can-be-a-burden-on-workers/2015/08/06/212ad5b6-3abb-11e5-9c2d-ed991d848c48_story.html?utm_term=.bb1f276bf6c3}  {``A License To Be a Florist? How Occupational Rules Can Be a Burden on Workers,''} {\it The Washington Post}).

\end{enumerate}

 \end{document}
