14.4 Bilateral Monopoly

Labor markets can get complicated when there's only one big employer and one big union. This creates a unique situation called a bilateral monopoly, where both sides have power to influence wages and jobs.

In this setup, the employer wants to keep costs down while the union fights for better pay. The outcome depends on who has more bargaining power. This can lead to wages and job numbers that aren't ideal for everyone involved.

Bilateral Monopoly in Labor Markets

Monopsony, Union, Bilateral Monopoly

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• Monopsony: single buyer of labor in a market faces an upward-sloping labor supply curve, giving it the power to set wages below the competitive level (coal mining town with one major employer)
• Union: organization representing workers' interests seeks to negotiate higher wages and better working conditions, can threaten to strike or withhold labor (United Auto Workers)
• Bilateral monopoly: labor market with a monopsony employer and a monopoly union, both parties have market power and engage in bargaining (professional sports leagues)
• Wage determination in a bilateral monopoly involves the monopsony employer aiming to minimize labor costs while the union aims to maximize wages and employment for its members, with the outcome depending on the relative bargaining power of each party
• Employment determination in a bilateral monopoly has the monopsony employer setting employment levels based on the negotiated wage, with higher wages leading to lower employment levels as the employer moves along its labor demand curve

Impact on Wages, Employment

• Bilateral monopoly: market structure with a single buyer (monopsony) and a single seller (monopoly), in labor markets the monopsony is the employer and the monopoly is the union (healthcare industry with a dominant hospital and nurses' union)
• Impact on wages: the outcome wage falls between the competitive wage and the monopsony wage, with the exact wage depending on the bargaining power of each party
• Impact on employment: employment levels are typically lower than in a competitive market, with the monopsony employer setting employment based on the negotiated wage and higher wages leading to lower employment as the employer moves along its labor demand curve (airline industry with powerful pilots' unions)
• Inefficiency in a bilateral monopoly arises as the outcome is generally inefficient compared to a competitive market, with a deadweight loss due to lower employment levels

Factors Influencing Bargaining Power

• Factors influencing union bargaining power include union membership and solidarity, the ability to strike or withhold labor, the availability of substitute workers, and public support and political influence (teachers' unions)
• Factors influencing monopsony bargaining power include the degree of labor market concentration, the elasticity of labor supply, the availability of alternative employment options for workers, and the financial resources of the employer (tech giants in Silicon Valley)
• The relative bargaining power determines the outcome, with higher wages and lower employment if the union has more bargaining power, and lower wages and higher employment if the monopsony has more bargaining power
• External factors affecting bargaining power include economic conditions and the business cycle, labor market regulations and policies, and technological changes affecting labor demand and supply (gig economy platforms like Uber)