Labour Markets and Wage Determination: Question 10

Worked solution

Part (a): How the union raises the wage by restricting labour supply

A trade union can raise its members’ wage above the competitive equilibrium level without needing to win a collective-bargaining dispute over pay directly, by instead restricting the supply of labour into the occupation. The RCO could, for example, operate a closed shop agreement, under which only RCO members may work as crane operators at Harbourline, or it could control the number of apprenticeship or training places available to qualify as a crane operator, deliberately limiting how many new operators can enter the profession each year.

Either action reduces the number of people willing and able to supply their labour as crane operators at every wage rate (a leftward shift of the labour supply curve, not a movement along it, since no individual crane operator’s own reservation wage needs to change for this effect to occur. With demand for crane operators unchanged but supply now smaller at every wage, the new competitive equilibrium wage is higher than before, and equilibrium employment is correspondingly lower than it would otherwise have been) the union has raised the wage precisely by making crane operators artificially scarce.

Part (b): Discussing the employment effect. The elasticity of demand for labour

Whatever the exact size of the wage rise the RCO secures, the resulting fall in employment depends on the price elasticity of demand for crane-operator labour, the more elastic this demand, the larger the fall in employment for any given wage rise, and the more inelastic, the smaller the fall. Several factors determine this elasticity:

Ease of substituting capital for labour. If Harbourline can readily replace crane operators with automated, remotely operated or fully autonomous cranes, then a higher wage will prompt substantial substitution away from labour, making demand for crane operators elastic and employment losses large. If automation is technically difficult or requires operators with judgement that machines cannot yet replicate (for instance handling irregular or hazardous cargo), demand will be more inelastic and employment losses smaller.

Elasticity of demand for the port’s own output. Since the demand for crane operators is a derived demand, it depends on demand for Harbourline’s port services. If shipping lines can easily switch their business to a rival port nearby, demand for Harbourline’s services is elastic; a higher wage bill that raises Harbourline’s handling charges would then quickly cost it business and threaten crane operators’ jobs. If Harbourline instead has few realistic rivals, for example because of its location or capacity, demand for its services is more inelastic, and a higher wage bill can be absorbed with a smaller effect on employment.

Labour’s share of total costs. If crane operators’ wages make up only a small proportion of Harbourline’s total costs, a given percentage wage rise adds relatively little to total costs, so demand for their labour is likely to be more inelastic and job losses limited. If wages are instead a large share of total costs, the same wage rise has a much bigger impact on Harbourline’s overall cost base, making demand more elastic and employment losses larger.

Time period. Demand for labour tends to be more inelastic in the short run, when Harbourline’s cranes and working practices are largely fixed, and more elastic in the long run, once the firm has time to redesign its terminal, invest in automated equipment, or renegotiate contracts with shipping lines. The employment effect of the RCO’s action may therefore be small immediately after the wage rise but grow larger over time.

Reaching a judgement. Taken together, the more easily Harbourline can automate, the more competition it faces from rival ports, the greater the share of costs crane operators’ wages represent, and the longer the time period considered, the more the RCO’s wage gain is likely to be eroded by falling employment. Conversely, where automation is difficult, rival ports are scarce, wage costs are a small share of the total, and the time period is short, the union is more likely to secure a higher wage for its members with only a small employment cost.

Final answers

• (a) The RCO raises the wage by restricting the supply of labour into the occupation (e.g. a closed shop or limiting training places), shifting the supply curve left and forcing a higher wage
• (b) The resulting fall in employment depends on the price elasticity of demand for crane-operator labour, which is greater, and so job losses larger, the easier automation is, the more elastic demand for the port’s services, the larger labour’s share of total costs, and the longer the time period; the reverse conditions mean a smaller fall in employment