Chapter 13
Government and the Labor Market: Legislation and Regulation

Government engages in the important task of establishing the legal rules for the economy. We will limit our analysis of the role of government here to four main topics; (1) the influence of labor relations law on labor markets, (2) the effects of federal minimum wage laws, (3) OSHA as an example of direct government intervention in the labor market, and (4) government laws that create "economic rent".


Table 13-1 provides a summary of basic labor relations laws. The labor relations laws summarized in that table affect the labor market in diverse ways, two of which are (1) by influencing the extent and growth of union membership, which in turn influences the ability of unions to secure wage gains; and (2) by establishing the rules under which collective bargaining transpires.

Labor Law and Union Membership

There can be no doubt that labor law per se can be an important determinant of union membership. This relationship between labor law and union membership is observable in both the private and public sectors.

1) Labor Law and Private-Sector Union Membership ­ Pre-1930 Period

Union organizers and members were legally unprotected against reprisals by employers or even government itself. Attempts to organize were met with discriminatory discharge in many instances. Those dismissed often were placed on blacklists and therefore denied opportunities to gain alternative employment. Workers sometimes were required to sign yellow-dog contracts, which were contract clauses that prohibited them from joining unions. Firms also utilized lockouts as a mechanism to stop union organizational attempts. Clashes between striking workers and strikebreakers were common, and government often intervened with police action on the side of employers during confrontations.

Court hostility toward unionization was a related factor explaining the low union membership during this period. Court hostility manifested itself in several ways, including (1) the court's interpretation of antitrust laws and (2) the use of injunctions against strike activity.

Summary: Prior to 1930, the absence of protective labor legislation allowed firms and the courts to repress union activity and growth. The low union membership translated into an ability of unions, in general, to make a significant impact on the overall labor market.

Post-1930 Period ­ The Norris-LaGuardia Act (1932) and the Wagner Act (1935) placed a protective umbrella over the union movement and greatly encouraged growth of union membership. The Norris-LaGuardia Act significantly reduced the personal costs of becoming a union member and thus made it easier to organize workers. The Wagner Act had even greater impact on union membership by promoting the growth of unions by guaranteeing unions (1) the right to self-organization, free of interference from employers, and (2) the right to bargain as a unit with employers.

The growing strength of labor unions produced a political backlash against unions, resulting in passage of the Taft-Hartley Act (1947) and the Landrum-Griffin Act (1959), both of which added "unfair labor practices" to workers to "balance" the unfair labor practices of management described in the Wagner Act.

2) Labor Law and Public-Sector Union Membership ­
The driving force in the organization of federal government workers has been a series of presidential executive orders that provided for the recognition of unions organizing government workers.

Labor Law and Bargaining Power

The overall body of labor law and specific provisions of the law influence bargaining power independently of effects on the level of union membership. Many provisions of labor law enhance the bargaining power of unions, enabling them to secure higher wage gains; other provisions strengthen the negotiating positions of employers.

1)  Limitation on the Use of the Injunction ­
The Norris-LaGuardia Act of 1932 placed into effect a limitation on the use of court-issued injunctions to enjoin picketing, striking, and related union activities. This prohibition clearly strengthen union bargaining power.

2) Prohibition of Secondary Boycotts ­
Secondary Boycotts are actions by one union to refuse to handle products made by a firm that is party to a labor dispute. Hot-Cargo clauses declared that trucking firms would not require unionized truckers to handle products made by "unfair" employers involved in a labor dispute (made illegal by the Landrum-Griffin Act in 1959).


The Fair Labor Standards Act of 1938 established a minimum wage.

The Competitive Model

The competitive labor supply and demand model is the best starting place for analyzing the possible labor market effects of the minimum wage.

1) Complete Coverage <figure 13-1>

<click here for slides on figure 13-1>

2) Incomplete Coverage
<figure 13-2> The minimum wage imposed in the covered sector of the low wage labor market reduces employment and the displaced workers seek employment in the uncovered sector.



<click here for slides on figure 13-2>

The Shock Effect

In chapter 7, the possibility was raised that in some situations an increase in the wage rate could increase the marginal product of labor and therefore increase labor demand. This possibility may be applicable to the imposition of a legal minimum wage.

<figure 13-3> A minimum wage may shock firms out of their organizational inefficiency. As a result, the marginal product of labor may rise, shifting the labor demand curve rightward. Consequently, a portion of the unemployment predicted by the basic model may be mitigated.

<click here for slides on figure 13-3>


<figure 13-4> Without the minimum wage, this monopsonist will choose to hire Q0 workers and pay a wage equal to W0. Any legal minimum wage above W0 and below W2 will transform the firm into a "wage-taker", and the firm will choose to increase its level of employment. For example, if the minimum wage is W1, this firm will hire the same number of workers as if competition existed in this labor market. Thus, it is possible that a minimum wage might cause employment to increase in some industries.

<click here for slides on figure 13-4>

Other Considerations

Two additional considerations concerning the minimum wage merit mention.

1) Union Support ­
Minimum-wage legislation may promote the economic self-interest of high-wage union labor. The minimum wage increases production costs and prices in the nonunion sector, while leaving costs and prices in the unionized sector unchanged.

2) Efficiency Wage Considerations ­

The unemployment created by the wage floor of the minimum wage MAY have the beneficial effect of discouraging shirking by low-paid workers throughout the economy.

Empirical Evidence

Investments in Human Capital -- The minimum wage reduces O-J-T. Some firms may decide against providing general job training if the minimum wage does not allow them to pay a lower wage during the training period, and thus the minimum wage may reduce the formation of this type of human capital. Also, there is some evidence that the minimum wage encourages teenagers to drop out of school to seek employment.

Income Inequality and Poverty ­ Most analysis indicates that the minimum wage does not affect the overall distribution of income or appreciably reduce poverty. About 70% of minimum-wage workers reside in families with incomes above 300% of the poverty line.


Government's intervention in the regulation of health and safety is an important aspect of labor markets. The most important interventions in this area are the state worker's compensation programs and the federal Occupational Safety and Health Act of 1970. The former mandates that firms purchase insurance that pays specified benefits to workers injured on the job and the latter requires employers to comply with workplace health and safety standards established under the legislation.

Profit Maximizing Level of Job Safety

Competition will force firms to minimize the costs of producing any specific amount of output. One cost of production is the cost of accidents and accident prevention. Figure 13-5 illustrates the optimal level of job safety. A profit maximizing firm will provide a level of job safety at which the marginal benefits of safety expenditures equal the marginal cost.

<figure 13-5>

<click here for slides on figure 13-5>

Societies Optimal Level of Job Safety ­ If workers have full information about possible work hazards and accurately assess the likelihood of occupational fatality, injury, or disease, then the amount of job safety offered by employers will match that level required to maximize society's well being. Where information about job hazards is limited and/or workers underestimate the personal risk of occupational fatality, injury, or disease, employers will provide less job safety than is socially optimal.

The Occupational Safety and Health Act of 1970 (OSHA)

OSHA interjected the federal government directly into regulation of workplace hazards. The act's purpose was to reduce the incidence of job injury and illness by identifying and eliminating hazards found in the workplace.

The Case For OSHA ­ Those who support OSHA contend that the costs of providing a healthy and safe workplace are legitimate business costs that should not be transferred to workers. They believe that imperfect information, underestimation of risk, and barriers to occupational barriers to mobility keep the market from providing the appropriate risk differentials for hazardous jobs, so there is a major role for the federal government to play in "correcting" these market failures.

The Case Against OSHA ­ OSHA's critics claim that the safety standards and inspections required by the act are unwarranted and costly intrusions by big government. They assert that the standards often bear no relationship to reductions in injury and illness. Many of the standards are trivial and some are even dangerous.

Findings and Implications ­ The controversy has been heightened by the mixed finding on whether the standards and inspections have reduced occupational accidents and injuries. Since the passage of OSHA, that rate of fatal injuries on the job has declined (but why?), and the rate of workdays lost per year from nonfatal accidents has risen.

Government as a Rent Provider

Government influences the terms of employment in many ways, not just by establishing laws and regulations. One such method is by providing economic rent to labor market participants. Economic rent in the labor market is the difference between the wage paid to a particular worker and the wage just sufficient to keep that person in his or her present employment. Remember from chapter 6 that a market labor supply curve is essentially a marginal opportunity cost curve, that is, it reflects the value of the worker's best alternative.

Why would the government provide economic rents to specific workers? Some economic and political theorists argue that the main goal of politicians is to get and stay elected. They offer and provide a wide range of publicly provided goods and services that enhance the utility of their constituents, many of which increase worker's rents.

The concept of rent provision is apparent in some instances of occupational licensure and in legislation that establishes tariffs, quotas, and domestic content laws.

<figure 13-6>

<click here for slides on figure 13-6>

See table 13-3 "Selected Licensed Occupations: State of Washington" for a list of some of the occupational labor markets that governments intervene in by requiring licenses to practice.

<figure 13-7>

<click here for slides on figure 13-7>

Tariffs, Quotas, and Domestic Content Rules

Government policies in international trade provide a second major example of governmental intervention that affects labor markets and ultimately provides economic rents to specific groups of workers. Figure 13-7 illustrates the gain in economic rents that tariffs, quotas, and domestic content rules provide to specific groups of workers at the expense of foreign workers and domestic consumers.

<figure 13-8>

<click here for slides on figure 13-8>