Labour-managed firms and monopsony power

International Journa9of Industrial Oqgnization 2 (19

Monopsony power in the labour market comparisons betwan an llhrh iabur-w fh(CF)cbp&X&lgin~~~marlrcts

1s

zshown to have important

firm (LMF) and 8 profit-m same technology. If the CF earns profits thm workersewn ‘/JilOE in the L&f8 t&m in the CF, and the IeveI of emfloyment in the LMF may be higher or lcxwerthan in the CF. Monopsony power is also see+nto have interesting implications for models 0%xwher&ip cantraction in LMFs.

Although the a[Blysis of l&our-managed Grms (L conducted witbir, a per&tly competitive framewor monopoly and oligopo’&tic behaviour have received attention. exception of Domar (?%@, however, there has been no ‘mplications of moncpony power in the labour market.’ This is surprising because a cent& theme in the literature is to compare the LMF and a c;rpita?lst Grm (Cl?) operating in the same marke technology. S&e WF:might expt the treatment of the labour input to be a possible source of diiferenss in behaviour, an examination of the implications of Ilabour market imperf~tions seems necessary. In section 2 it is shown that. the existence of an upward-sloping labour supply curve does have impor%:~~tSansequences for these comparisons A second area of concern in the literature is to consider the criteria used by LMFlc wherl contemplating reductions in the size of the membership. Section 3 demonstrates that, once shape of the labour supply schedu?.e2s an important determinan CF has mo:nopsony power w it latitude in fix& the wa supply curve. For convenience upward-sloping labour supply c *I am grateful to Keith CowIing and Peter Law for valuable comments. This research was undertaken during the tezwe of an SSRC studentship. lkw (1982) for a comprehensive survey of the existing literat 0167.-7187/84/

.V. (

64

firmr,monopsony power

G. Stewart, Lubouwnmaged

F admits members rather than hires workers, and thus its behaviour, ke that of the CF, is frequently unaffected by the supply curve. Samuelson (1970, p. 562) recognises that monopsony power may exist in s of agriculture but argues in general that ‘it is more aces like the tin mines of Bolivia or the lumber camps o ere people are, in fact, mobile in history, than it is in a modern econo were monopsony power to moving to better job opportunities”. limited to such cases it would merit attention, but there are a reasons which suggest that it is a more general phenomenon ‘modern economy’. Firstly, imperfect worker information on the existence and nature of alternative jobs may convey a degree of monopsony power to firms. Secondly, there are many social and institutional barriers to geographical mobility. Finally, the literature on segmented labour market emphasises the barriers to mobility even within a re on. Although there has been relatively little empirical work, a number of studies have supported the existence of monopsony power in certain markets?

In their discussion of the existing literature on LMFs, Ireland and Law (1982, pp. 35-36) note that a frequent and central topic ‘is to compare its equilibrium with that of a same technology PM (profit-maximising) firm operating in the same product and capital markets but facing a given wage ve labour market’. The objective of the LMF is usually the maximisation of income per member; this is known as the Illyrian model. Such comparisons predict that, with perfect competition in the product market and in long-run zero-profit equilibrium, the two enterprise types have the same employment level and income per member in the will equal the wage rate in the CF. If there was imperfect competition in the product market then, assuming the CF earned positive profits, income per member would exceed the wage rate but the wer workers. Domar (1966) examined the implications es for LMF behaviour but did not and CF equilibria when both firms face a this section we will sh that, if there is ket then the Illyrian L might employ worker incomes. are assumed to produce an identical product, Q, ction in which the number of work also faces the s

where R=PQ, w = wage rate,

subject to

P=P(Q) with P&O, Q=QSN) w=g(N)

with QN>O, QMo.

aximisation yields

the

expression

R,=w+Nw,,

(2)

us under conditions of where 4 is the elasticity of labour supply. ill monopsony power in the labour market, the wages receive be below their martinal revenue product. This equilibrium can now Ix

contrasted with that of an Illyrian L The objective of an Illyrian L

is

to

maxy=(R-F)/N, N

subject to p=p(Q)

with

p&o,

Q=Q(N) y g&N)

with with

QN>O, QNNO.

Given the existence of fixed costs and

6

6. Stewart, Labour-maraaged w +

fums,mmwpsony

power

NW

Fig. 1

so that provided the C is earning positive profits we must have y> w at NC N) to the right of NC. supply constraint is binding on the LMF and if sitive profits, then the LMF equilibrium (IV’+& produces higher worker incomes than does the CF. If the the two equilibria would be identical,

emonstrate that we can have

teresting issue concerning the

6.

s

C

L

Fig. 2a

E

YL

WC

Fig.

2’b

n obtaned. First, if, as a result n this section two results have wer, a CF is able to earn monopsony will exceed the wage pai worker in a would be true if the source of pro!st dly, the equilibrium employment level m the n that in the CF. This contrasts $3 the p ere a profitable CF will e nslat~ into a compafi eland and Law (1982, zhan with a CF monopoly, it is clear be greater with a L true in the monopsony case. om the above that the reverse may Pt

In this section we supply schedule for

e implications of an upward-sloping labour zadjustment by both the traditional Illyrian hich incorporate compensation schemes or

Consider first the comparative static response to a change in either P or F. It is well known that in the simple single output, single variable input model an Illyrian f’irrn operating ifn a competitive labour market would reduce M following either a fall in F or rise in P. The latter is often referred to as the ‘perverse supply response’. mar however show& that such paradoxical behaviour disappears if the L faces a labour supply constraint which is binding. As can be seen from fig. !, an u ard shift in the y-schedule following a reduction in F or increase in enables the LMF LOoperate further up the labour supply schedule thus achieFing a hi r level of both income and employment. &aversely a I=& in F or J in P might be expected to result in a fall in as some workers leave for more desirable opportunities outside the firm. owever by leaving these workers cause a further reduction in the incomes of remaining members. Meade (1972) argues that if the fixed costs had been red by all the members it is not a true participatory coy indi~dual member can without any obligation just walk out and leave the remainder wit the full debt burden. e shall return to this constraint is not binding we suggested above that the rate at the maximum of the y-schedule. In this case, static response of an Illyrian b will be identical to

example, men and women) profit maximhatiun dictates that they will receive different wages. A WOT e same amount.

hip level and A

is the income available to wor

incme hip level which m initial price, PO, and A is assumed to be equal to that maximum can then be shown that if the price rises fro P, to P then

and Law (1982, p. 22). on

in

ot

sation or voting with se to a rise in price (0

om selection the

situations other than

crmc in both price NO to a lower level Let us now introduce an upward-sloping labour supply schedule into the analysis. As noted above, each point on the schedule relates to a specific individual and shows the minimum income level at which they are prepared think of it as depicting the eive were they to leave the

ill not alter its membership in response to a rise in P equaled the initial level of LMF income, y,. With the f an upward-sloping labour supply curvy the maximum value

ome more interesting, however, if we

Fig. 3

may have been some workers with values of member rssociated with the new y-sched-ule. 1~ 5~ preceded by so Wo,yo) might have Consider, for sim ty, an initial combination, 3? d the firm reduce membership towards the members had to be compensated? As each me dep different outside income the compensation paid w across individuals if the post compensatio such a scheme were possible then member point where

Thus in fig. 3, membership falls fr membership will, as a group, gain that could be earned outside contribution to the reve

. Stewart,

72

Labour-

naged jhm,

nronopsony power

ever, be possible to discriminat

(11) ce t

e of the

st e

V2= y(N) - C((& - N)/N) =

(12)

so, =Y(

(13)

aximicatinn -I-vu c1v1 w&h res=p,ct to ,P?.+*e!ds the first-order conditiion g(N)-@,--

N)g,=R,.

(14)

Comparison

of (14) and (IO) reveals that the membership reduction will be e single compensation level case than if individual compensation is tuitively this is because in the former case all of the leavers, except the marginal one, are being over-compensated in that they receive ore than is required to make them leave. Thus it costs the remaining LMF e in compensation for any given membership reduction. suggested scheme is that no corn nsation is paid but workers p size in the knowledge that they have an any dismissals. As before we assume that se expected income. For individual i this is given

I.C ((

- F)IN)(NIKJ + A,((& -NW%), 9

ves

!

<

N
(15)

NZiV,.

(16)

end up with the same net inc reduced as long as &‘V)> R,. It

level of compensation

was set.

The most important results in this pa monopsony poarer in the labour ma LMF and a profit-maximising CF same technology. I CF earns positive

ver, whereas in the latter case workers than the LMF might employ m

*It is interesting to note that i9”t could produce Ai’S

th

74

6. Stewart,

i!ddour-managedj%rnS,monopsony power

The second half of the paper examined short-run membership adjustment s. As noted by Domar (1966), an upward-sloping labour sup WHACK prevents the attainment of the peak of the income

sted that ike Illyrian r supply constraint is not binding we su t&faction r&h the aves ic the traditional way. However to the introduction of ‘perverse’ mem~rs~i~ response has recently 1 sation, or voting combined with Is which incorporate either a horizontal labour supply curve m selection for dismissal. As these models predict that the LMF will not adjust membership following a price rise or fall in fixed costs from a previous Illyrian equilibrium. Brewer Browning (1982) show, however, that with particular initial conditions a F which has voting or compensation schemes may engage in some rship reduction. It was shown in section 3 that upward-sloping labour not er the pre tion of no response to a price rise or ever the type situation examined by Brewer and P**..,WGnll ,4:rl lead to L4PCM,LSR CS*R”PmX.aa- I%.., U‘U ,UrL?rwullg k”llC!GrjUC”%GJ. U1VWWqj m**fiSW”rrmrr lll”ll”yJ”llJ bi IUW, example, schemes whi& would prod identkal results under perfect competition no longer do so under monopsony.

Addison, J.T. and W.9. Siehert, 1979, The market for labor: An analytical treatment (Goodyear, Santa Monica, CA). rewer, A.A. and MJ. Browning, 1982, On the employment decision of a labour-managed firm, Economica 49, 141-146. Domar, l:..D., 1946, The Soviet collective farm as a producer coope~&e, American Economic ?zevi.L: 44, 73:-757. Ireland, N-h. and P.J. Law, 1982, Economics of labour-managed enterprises (Groom Helm, London). Meade, J.E., 1972, The theory of lahour-managed firms and of profit-sharing, Economic Journal 83 402-428. Pauly, M. and M. Wedisch, 1973, The not-for-profit hospital as a phy+ians’ cooperative, American Econami: Review 63.8~$9. Samuelson, P.A., 1970, L:,“qc.&s (McGraw-Hill, New York). Steinhex. 79, Is there a negatively-sloped supply curve in the lahourmanag ysis and Workers’ Management 12,23-33.