Question

Explain

a) how unions can work to widen wage gaps for workers and to reduce overall employment in an economy.

b) how unions reduce efficiency and produce deadweight loss in an economy

Answer 1

a) Unions are orgqnizations of workers that strive for higher wages through collective bargaining. They are able to ask for higher wages by restricting supply of labor. However, this leads to widen wage gaps between unionized workers and the non-unionized workers. Following graph explain it where, if there is no union, labor supply curve is upward sloping and both industry are paying wc wage to all workers. In presence of union in industry 1, labour supply is restrictive and is given by wuABLs and the wages increase to wu. This creates unemployment (Lc - Lu) in industry 1 and the workers laid off go to industry 1. This increases employment in industry 2 (Lnu - Lc), driving down the wages to wnu. Therefore, wage gap is wu-wnu, which depends on the elasticity of labor demand. Inelastic labor demand of union market will lead to higher wage differential.

b) Unions lead to reduced efficiency because it provides benefit to unionized workers at the expense of nonunionized workers. Firms hire less workers than needed to reduce employment in unionized industry and some workers are laid off. Therefore, unions lead to deadweight loss shown in the disgram by the shaded portion areaAEC.