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1. Introduction:
Perfect competition is unreal market situation and what we find in the real world markets is imperfect competition. In imperfect competition demand curve (AR) slopes downwards and AR and MR are different.
[V.M.P. = M.P.P.×Price (or AR)]
V.M.P. — Value of Marginal Physical Product
MPP — Marginal Physical Product
(M.R.P.=M.P.P.×MR)
MRP — Marginal Revenue Product]
As in imperfect competition MR<AR; therefore, VMP>MRP.
However, there is imperfect competition, not only in the product market but also in the labour market. Therefore, the average wage (AW) and marginal wage (MW) curves slope upwards. Theoretically, we may have combinations of different situations in the product and the labour markets.
2. Factor Pricing under Imperfect Markets:
Case1:- When there is perfect competition in the product market but imperfect competition
(or monopsony) in the labour market, in this situation (diagram No. 1)there being perfect
competition in the product market VMP = MRP.
But as there is imperfect competition in the labour market AW and MW slope upwards and are different. For profit maximisation, equilibrium is at E where MRP = (=VMP) = MW, but the wages are paid according to AW. Therefore, OW, wages are
determined. The firm gets WTMG abnormal profits because of imperfect competition in the labour market.
Case 2. When there is imperfect competition (monopoly) in the product market and perfect competition in the labour market. In this case (diagram No. 2) VMP>MRP but AW = MW are constant. Equilibrium is at E where MRP = MW (= AW), OW wage rate prevails but the wage rate is less than VMP because of imperfect competition in the product market.
Case 3. When there is imperfect competition (Monopoly) in the product market ant imperfect
competition (monopsony) in the labour market. In this case VMP>MRP and AW and MW slope
upward (diagram No. 3) Equilibrium is at E where MW = MRP, but wages are determined according
to AW. Thus OW wages are fixed. Workers get less than the MRP and VMP both.
3. Exploitation of Labour
According to Mrs. Joan Robinson, perfect competition is the ideal market situation and in perfect competition wages = MRP = VMP. Any deviation from it amounts to exploitation. In this sense if wages are less than VMP, but equals to MRP, it is called monopolistic exploitation. If the wages are less than MRP, (-VMP) is called
monopolistic exploitation and if the wages are less than VMP and MRP (VMP = MRP) both there is double exploitation of labour. In Figure (3) total exploitation of labour is equal to WTMR, of which WTEG is monopolistic exploitation (which is due to
imperfections in the labour market) and GEMR is monopolistic exploitation (which is due to imperfections in the product (market).
However, Chamberlin is of the opinion that in monopolistic competition factors are paid according to MRP and not VMP labour is exploited only if wage rates are less than MRP. An important implication can be derived from it that trade unions can succeed in eliminating monoponistic exploitation only and monopolistic exploitation
which is due to imperfection in the perfect market cannot be eliminated.
4. Wage determination in Bilateral Monopoly
In the labour market when trade union in very strong and workers are completely united, trade union becomes a single seller of labour service. On the other hand, if there is one employer or an association of employers representing itself as
single buyer of labour service the market situation is that of bilateral monopoly. This is also known as Collective bargaining. Like price determination in bilateral monopoly, wage determination also results in various assumptions. There is no adequate theory to explain wage determination
in bilateral monopoly, but different theories have concentrated on different aspects of wage-determination. Some theories examine the nature of union wage policy, other examine the nature of bargaining power and still others the bargaining itself.
5. Dunlop and Fellner Models
These Models examine the nature of wages policy of the trade union. According to Dunlop model, trade unions maximize some goal or combination of goals. Trade union may want to keep all members employed, maximize the income of its members or maximize the wages of core members only. All these goals cannot reconcilet together but all goals are also not necessarily in conflict. Union generally estimates elasticity of demand for its members and tries to maximize wages and employment. Other factors like loyalty of the member-equality of union leadership and desire of union leaders to remain in office also effect unions wage policy. Fellner also examined the nature of wage policy. Unions usually want optimum combination of wages and employment. Fellner employed indifference curves to explain the choice of optimum combination. The extreme case is when union considers only wages and does not care about employment. In this case indifference curves are straight lines. Unions wants to reach the highest possible indifference curve.
As shown in diagram (6) Union can reach I3(curve) , indifference curve at the most. Equilibrium is at E where ARP is the highest. Usually trade unions keep in view both wages and employment and indifference curves are downward sloping as in diagram (7). Employer employs workers according to MRP. Thus from the employer’s point of view equilibrium can at the most be reached when wage rate = MRP. The highest possible indifference curve which the unions reach is I3(curve) Thus ON employment andO OW wage rate are determined. However, if the union adopts all or nothing policy it can reach I4(curve) .Equilibrium will be E, where I4(curve) is tangent to ARP. Since equilibrium settlement has to be on the MRP curve the lower limit is represented by E1 where the lowest acceptable indifference curve of the union intersects MRP curve. The point E2 sets the lower limit below which the wage rate will be not fall. The union does not accept work at all, below wage rate OW1. Thus wages will be determined usually
between W1 W by ‘give and take’ policy, depending upon relative bargaining strength of the two parties.
6. Cartter’s Models
The major shortcoming in the Fellner’s model is that he has not introduced employer’s preference functions in the bargaining process. A.M. Cartter in his book Theory of Wages and Employment (1959) introduced employer’s preference functions. He also pointed out magnitude of substitution between wage levels.
1)Union’s Preference Path :-
If demand for labour increases the union prefers wage increases much more than increase in employment. When demand for labour decreases union resists wages reductions in employment and thus the wage-preference path is having a kink
at the prevailing level (E), the upper portion being less elastic and the lower portion more elastic (Fig. 8)
2)Employer’s Preference Curves
The objective of the employer is to get maximum profit. Profitability of various combinations of wages and employment can be shown through ‘Average Net Revenue Product’ (ANRP).
ANRP of labour = APRL - AC of other factors except entrepreneur.
There is some wage rate for which profit is zero. To such in ANRP a fixed profit is added and cost of other factors is deducted then various combinations on ANRP show fixed profits to the entrepreneur. These curves have their maximum at MRP, because when the producer is at MRP, his profit is maximum. As wages reduce the lower (PE2,PE3, etc.) preference curves show higher profits (diagram 9).
3)Wage Determination
Wage determination in bilateral monopoly can be explained by combining the indifference maps of the trade unions and the employers (diagram 10) 11, 12, 13 etc. are the union indifference curves and PE1 PE2 etc. are the profit indifference curves of the employer. Point-E on the MRP curve represents the currently prevailing wage employment combination and union’s wage preference path is linked at point E.
If demand for labour is constant the prevailing point E is to be maintained as a result of fresh bargaining. The union can increase its satisfaction by moving along the wage preference path and the employer can increase his profit by moving down E
along MRP. However, the demand for labour being constant, the employer will not insist on moving down E, since his profits have not fallen. The employer will stick to present wage-employment combination E. The Union satisfaction on the other, will be lower if it moves upward or downward from point E along the labour demand curve (i.e. along MRP curve) because only lower order indifference curves of the union cut
the MRP curve from above and below the point E.
However, the union will be better off if it moves along the wage-preference path to a point above E. But such a preferred position cannot be maintained when the employer is free to determine the amount of employment. If the union tries to move from point E to E1 , and raise the wage rate to OW1 then the employer being free to adjust the level of employment will reduce the employment to W/L level indicated by the union worse off than the original position E since L lies on a lower order Union’s indifference curve (I2) than point E. Thus the prevailing level of wages and employment will be maintained. However, there is one special case when union can demand wage increase though the labour demand remains the same. The case occurs when the demand curve for labour (i.e. MRP curve) is highly wage inelastic. Then there is a possibility that the Union may succeed in getting higher wages without substantial fall in employment. However such a case may lead to strikes and lock outs. Again such case can occur in the short run only. The solution of wage determination in bilateral monopoly has been explained in terms of bargaining ranges in Cartter’s model and in a sense equilibrium is not determinate.
Samuelson has mentioned the choices open to trade union and employer’s association in bilateral monopoly. At the meeting of the representatives of the unions and employers several arguments are given and some solution may be reached depending upon the bargaining strength of the two parties. Several empirical studies have shown that wages in the unionised industries are higher indicating that the trade unions do succeed in getting higher wages.
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