Understanding Labor Markets: Dynamics of Supply, Demand, and Unions

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Q.1
a) A labor market consists of the buying and selling of labor. Thus, it consists of all the people willing to work and all the firms/organizations that are looking to hire a worker. As long as there is a supply of a good and a demand for a good a market will exist. Thus as long as there are people looking to trade their labor services for wages and there are firms that seek to hire people a labor market will exist.
b) The normal concepts of supply and demand must be altered when we look at labor markets where the demand for labor is highly heterogeneous; that is firms are looking for very particular skills that most don’t have. When very particular skills are looked for and no two people will do the job exactly the same the normal supply and demand model must be altered. Furthermore when we are looking at labor markets where there are unions, regulations and other forms of barriers to hiring and firing workers(Ontario Labor Market)(Rubinfeild).
c) An example of this is when there is a union. Usually when there is a decrease in demand normal supply and demand models would predict that there would be fall in the quantity of labor employed. However with a union it may be impossible to do this. The Union may act as if many employees are one. Thus, while you have 100 workers and would like to fire five you have to either fire all of them or none of them. This is because the union has agreed to all leave work if one member is fired.
Q.2
a) The following graph illustrates the short and long run demand for labor.

The simple difference is that the demand for labor is much more inelastic in the short run; that is the number of workers is less responsive to changes in wages. These long run the demand becomes much more elastic. That is, in the long run, the number of workers demanded is much more responsive to changes in the wage rate. This will happen as firms change their operating procedures to allow them to find more workers in different labor markets. It will also occur as labor moves to the jobs, this may not be possible in the short run.
(Texas Tech University)
b) The substitutions effect says that as workers become more expensive a firm will substitute to use more capital and less labor; and vice versa. The output effect states that at some point in production all the inputs will start to become more expensive, labor, in particular, as the demand for labor increases. There is only a limited supply of labor so at some point the cost of labor will begin to rise.
c) This is a result of a substitution from work to leisure as workers get wealthier. In the short run normal supply effects work, as the wage rate goes up more workers will be willing to work. However in the long run there is another effect that works against the supply of labor. That is when workers begin to have more money and thus spend more on consumption. One particular good that will see an increase in demand is that of leisure. Since leisure consists of time at some point a worker will then choose to work less and spend more time in leisure.
Q.3
a) This statement is very unlikely to be true. What it states is that white collar workers and women would value unions less than blue-collar men. While the labor force has grown dramatically over this period in the proportion of the work force that is made up of white collar workers and women, there is no reason to think this explains the effect. It is most likely that this is a spurious correlation. It is more likely that the decrease in unions has been caused by the increased ability by firms to break unions by moving production to other countries.
b) This statement makes very little sense. If unions were successful in increasing wages, then they would have become more successful not less. The reverse is more likely to be true; unionization has dropped as the unions have not been very successful in providing higher wages for their workers. In fact, the decline in unionization might be because an employer might be willing to offer a higher wage to the same worker if that worker is not part of a union.
c) This statement is very flawed, for one the employer never starts the process of unionization. An employer never has the incentive for their workers to be unionized since it can only lead to less freedom to hire and fire workers. What may be true is that unionized firms are indeed less profitable meaning that the employer is more likely to go out of business. Thus we will see less and less unionized firms, however it is not because the employer will choose to unionize less, it is because employees will choose to unionize less realizing perhaps that it will ultimately lead to the firm going bankrupt or going out of business.
Works Cited
BIBLIOGRAPHY Ontario Labor Market. Guilde to using Labor Market information in Ontario. n.d. https://www.tcu.gov.on.ca/eng/labourmarket/currenttrends/docs/guide.pdf. 5 5 2015.
Rubinfeild, Pindyck. Microeconomics. Prentice Hall, 2012.
Texas Tech University. Texas Tech. n.d. http://asp.tosm.ttu.edu/uc/courses/eco2301/ls11/disc11.asp. 5 5 2015.