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 w = 18 – Ed , where Ed = the number (in thousands) of workers. The supply of labor in each sector is Es = w – 2, where w = the wage rate (dollars per hour). A union organizes in one of the sectors, and it restricts supply to that sector by insisting that only those in the union are hired by firms in that sector (and it is difficult to get into the union). When the employees in this sector unionize, the supply of labor in that sector changes to Es = w – 4.
a) What is the wage rate in both sectors before unionization? How many employees will be hired in each sector?
b) What is the wage rate in the unionized sector? How many employees will be hired in the unionized sector?
c) If the unemployed workers in the newly unionized sector spill over into the nonunion sector, what will be the wage rate in the nonunion sector? How many employees will be hired in that sector?
d) What is the union relative wage advantage (union wage/nonunion wage)? What is the true absolute effect (union wage/equilibrium wage in the absence of a union)?
e) Suppose the employees in the non-unionized sector want a union to represent them as well. In an attempt to discourage a union from forming in this sector, the employers in that sector offer a wage rate of $10.50. How many nonunion workers will be hired? What is the union relative wage advantage?