The president of the United Auto Workers has noticed that whenever he negotiates a pay increase for the UAW membership, the number of jobs available for the union membership is unaffected in the first few months of the contract, but over the following year and longer the number of union jobs falls. He has noticed that on average for every 1% change in the wage rate, there is a resultant 1.5% loss in the number of jobs.
In terms of elasticities, describe the demand for UAW members’ labor services. Make sure you discuss how it changes over time.
Calculate the price elasticity of demand for the UAW members’ services at the beginning and after 1 year.
How does the total wage bill (the total amount of money spent on wages) of the employers of UAW members change over the first few months of the contract (think short-run)? Why?
How does the total wage bill of the employers of UAW members change a year after the contract is signed (think long-run)? Why?