It can be shown that an industry’s demand for labor will become more elastic when the demand for the industry’s product becomes more elastic. Let’s consider the implications of this fact for the U.S. automobile industry and the auto workers’ union (the UAW).
a. What happened to the elasticity of demand for American cars when the Japanese developed a strong auto industry? What happened to the elasticity of demand for American autoworkers? Explain.
b. As the chapter explains, a union generally faces a tradeoff in deciding how much to raise wages, because a bigger increase is better for workers who remain employed but also results in a greater reduction in employment. How did the rise in auto imports from Japan affect the wage-employment tradeoff faced by the UAW?
c. Do you think the growth of the Japanese auto industry increased or decreased the gap between the competitive wage and the wage chosen by the UAW? Explain.