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Economics U$A: 21st Century Edition

Labor and Management (Microeconomics)

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The International Ladies Garment Workers’ Union (ILGWU) strike in the early 1900s was inspired by poor working conditions and low wages. In 1984, Congress bailed out the Chrysler Auto company after Chairman Lee Iaccoca and Douglas Fraser, chief of the United Auto Workers, came to an agreement. Why does Walmart choose low prices over high wages, and how do they get away with it? These stories show how labor unions and corporate managers battle to affect the supply of labor, wages, and prices.

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Unit Overview


To discuss how the demand for labor depends on the marginal value product and the real wage rate, and how labor unions affect the supply of labor, wages, and economic efficiency.


  1. Marginal product of labor.
    • The additional number of units of output a firm can produce because it has hired one more worker is the marginal physical product of that worker. The marginal value product of labor is the dollar value of the marginal physical product.
    • If a firm hires more and more workers (but does not increase or improve the equipment those workers can use), each additional worker’s marginal physical product will be less (diminishing returns to labor).
  2. A profit-maximizing firm will not pay more for a worker than he/she contributes to output. A firm that is not buying more equipment will maximize profits if it expands production (hires more workers) up to the point at which the marginal value product of the last worker hired equals the going wage.
  3. Labor unions can raise wages by artificially restricting the supply of labor available to the firm. In the long run this reduces the number of workers the firm will employ.
  4. Unions can contribute to economic output by reducing labor turnover and by improving communication between workers and management. Unions can reduce economic output by obstructing technical change, restricting work rules, and exacerbating inflation.

Meet the Series Experts

Leon Stein

Union advocate, organizer in the International Ladies’ Garment Workers’ Union (ILGWU), and author who wrote about that union’s history. He began working at age sixteen as a cloth spreader in a garment shop, where he joined the ILGWU. After graduating from college, he returned to the garment industry as a cutter and in 1941 became a full-time union organizer. He contributed articles to Justice, the newspaper of the ILGWU, and became editor in 1952. Mr. Stein’s books include The Triangle Fire (about the fire at the Triangle Shirtwaist Company that took the lives of 146 people) and Out of the Sweatshop, a documentary history of the ILGWU. He received his B.A. from the City University of New York.

Douglas Fraser

A leader in the U.S. trade union movement, where he rose to the highest ranks of the United Auto Workers (UAW). He began his career as a teenage worker in a machine shop, then became a skilled metal finisher in a Chrysler DeSoto factory where he joined the UAW and was twice fired for his union beliefs and activities. He was elected President of the UAW Local 227, in 1943. After WWII, he climbed through the UAW ranks, as an international representative, a negotiator during a 104-day strike at Chrysler, and Administrative Assistant to UAW President Walter Reuther. Later, he became Co-Director of UAW Region 1A, Member-at-Large of the international UAW Board of Directors, Director of the UAW’s Chrysler, Skilled Trades and Technical Office and Professional Departments, and Vice-President of the UAW.

Jack Barbash

Educator and an architect of the 1955 merger of a divided trade union movement into the AFL-CIO. He was the John P. Bascom Professor Emeritus of Economics and Industrial Relations at the University of Wisconsin, where he taught for 24 years. A prolific author, he wrote, edited, or contributed to books chronicling the labor movement and the history of economic thought. He held positions in the federal government, labor movement, and academia, serving in the U.S. Office of Education, Department of Labor, and on the National Labor Relations Board. He also served as Research and Education Director for the Amalgamated Meat Cutters Union and for the American Federation of Labor–Congress of Industrial Organizations (AFL-CIO) Industrial Union. Mr. Barbash received his B.A. and M.A. from New York University.

Peter Van Doren

Senior Fellow at the Cato Institute, Editor of the quarterly journal Regulation, and expert in the regulation of housing, land, energy, the environment, transportation, and labor. He has taught at the Woodrow Wilson School of Public and International Affairs at Princeton University, the Yale School of Organization and Management, and the University of North Carolina at Chapel Hill. His writing has been published in the Wall Street Journal, the Washington Post, Journal of Commerce, and the New York Post. He has also appeared on CNN, CNBC, Fox News Channel, and Voice of America. Dr. Van Doren received his B.A. from the Massachusetts Institute of Technology and M.A. and Ph.D. from Yale University.

What's your Economics IQ?

Take the Economics USA: Labor and Management Quiz.

Quiz Addendum:

1. Answer explanation: Demand curve to the right. This is so because it will increase output per worker, thus making each worker more valuable to an employer.

3. The equilibrium wage for this market will be:






Answer: W4. This is the point at which the demand and supply curves intersect.

4. This wage represents an equilibrium because…






Answer: a higher wage would produce an excess supply; a lower wage, an excess demand.






  • bilateral monopoly
    When a market consists of only one manufacturer and one consumer of the products that manufacturer puts out.
  • collective bargaining
    A process of negotiation between union and management over wages and working conditions.
  • diminishing returns to labor
    When each additional unit of labor added to other resources used in the production of goods and services adds a smaller additional output than the previous unit.
  • labor
    Human effort, both physical and mental, used to produce goods and services.
  • labor productivity
    The amount of output divided by the number of units of labor employed.
  • labor-saving technology
    Technological devices used purely for the purpose of diminishing the amount of labor necessary to accomplish goals.
  • marginal product of an input
    The addition to total output that results from the addition of an extra unit of input (the quantities of all other inputs being held constant).
  • marginal product of labor
    The additional output resulting from the addition of an extra unit of labor.
  • monopsony
    A market state in which there is only one producer of a good or service.

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Economics U$A: 21st Century Edition


Produced by the Educational Film Center. 2012.
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  • ISBN: 1-57680-895-5