Question

Explain the paradox that establishing a union can increase both wages and employment, but once the union is established it must trade off increases in one for the other.

Answer 1

When a union is established, then it does collective bargaining on behalf of the workers who are associated with the union. It causes increase in the wage of workers as well as protection to the workers in term of their firings from the end of employers. So, it is though that union is also going to protect, the employment status of the workers.

But, increase in wage rates, increase the wage bill and it increases the cost at the end of employers. Now, employer has to offset the cost, by demanding less workers. So, it increases the unemployment. Hence, increase in wage lead to increase in unemployment and union has to make s tradeoff between how much rise in wages and how many worker s to be employed so that a balance is created. Here, union also works against those workers who are not the member of the union and work to make those as unemployed first by the firms. So, it is a further increase in unemployment in the market.