Question

Graphically show the effect on both the union and non-union labor markets if a union successfully negotiates a higher wage.

Answer 1

If a union successfully negotiates a higher wage this will have the below effects on both union and non union labour markets.

1. Spill over effect: As there has been an increase in wages in union market this will lead to lower unemployment levels in union market thereby transferring additional workforce to non union market. This will increase supply of labour in non union market and result in wage drop.

2. Threat effect: Non union firms may start to pay higher to break the union power. This will result in higher wages in the non union markets.

3. Product market effect: As the wages cost is high in union markets, this will result in high cost of production in industries operating in union markets. This may induce consumer to shift to low priced goods made in non union labour markets. This will then increase demand of goods and wages of non union labour.

4. Wages in the union markets will rise because of higher negotiated wages.

5. As cost of production have increased in the union markets, this may induce employers to reduce cost in providing basic amenities to labour. This will then result in less amenities to workers employed in union markets.

As this can be seen in the diagram.

In union markets wage has increased.

In non union market wage may decrease (Spillover effect) or increase (Threat effect).

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