Suppose there are two sectors of the construction industry that currently pay their employees the market-clearing wage. The demand for labor in each sector is MRPL=20-L, where L is the number of workers (in thousands). The supply of labor in each sector is L=W-4, where W is the wage.
What is the wage rate in both sectors before unionization? How many employees are hired in each sector?
A union organizes in one of the sectors, and negotiates a 25% wage increase. What is the wage and employment level in the union sector?
Suppose that the workers that are no longer able to find jobs in the unionized sector migrate into the nonunion sector, so that labor supply in this sector is now . Now what will be the wage rate and employment level in the nonunion sector?
What is the union’s relative wage advantage? How does this compare to the true absolute effect of the union on wages?
Suppose that the workers in the nonunionized sector begin to explore the idea of unionizing as well. In order to deter this, the employers in this sector raise wages to $14 an hour. Now what will be the level of employment in the nonunion sector? What is the union’s relative wage advantage?