The Labor Market for Sheep Herding

EconEye Admin

4 years ago

Shepherds in the United States have launched a lawsuit against their employers for illegally suppressing their wages by acting as a cartel. The lawsuit claims that the employers violated the Sherman Act.—Reuters

Data

According to Comparably.com, the average annual salary of a shepherd is $26,213.
According to this Wall Street Journal article, there are around 1,500 shepherds in the United States.
If a shepherd works a normal 2,000 hours a year, the hourly wage rate (rounded) is $13.

What is the Sherman Act?

The Sherman Antitrust Act of 1890 is an antitrust law—a law the regulates oligopolies and prevents them from becoming monopolies or behaving like monopolies. The Sherman Act made it a felony in the United States to create or attempt to create a monopoly or a cartel.

What is a monopsony?

A monopsony is a market in which there is a single buyer. A monopsony labor market has one employer. The Sherman Act has not been applied to monopsony before.

Why would sheep herding ranches form a cartel?

Click here to watch a short video that explains the answer.

Who wins and who loses when ranches are prevented from forming a cartel?

Click here to watch a short video that explains the answer.

Work these questions to check your understanding and get instant feedback.

Answer the following questions to check your understanding of the story.

Suppose a labor market is initially in a competitive equilibrium. The firms collude and begin operating as a monopsony. What happens to the wage rate and to firms’ economic profit?

When the firms begin operating as a monopsony, the wage rate ____________, and the firms’ economic profit ____________.

a) falls; decreases

b) rises; decreases

c) rises; increases

d) falls; increases

Wrong! - What is the firms’ motivation to act as a monopsony? How do they achieve this objective? Does the collusion benefit the firms or the workers?

That's Right! - When firms operate as a cartel, they maximize economic profit by hiring fewer workers and pay a lower wage rate.

If the Sherman law rules the cartel as illegal, and firms begin competing in a competitive labor market, what happens to workers’ surplus and firms’ surplus?

Workers’ surplus ____________ and firms’ surplus _____________.

a) decreases; increases

b) increases; decreases

c) increases; increases

d) decreases; decreases

Wrong! - When the labor market becomes competitive, what happens to the quantity of labor hired? To the wage rate? And how do these changes affect workers’ surplus and firms’ surplus?

That's Right! - When the labor market becomes competitive, the quantity of labor hired increases and the wage rate rises, so workers’ surplus increases and firms’ surplus decreases.

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