Question

The American Federation of Bricklayers union (AFB) faces a situation in which a wage of $16 per hour results in a demand for 20,000 worker-hours, while a wage of $20 per hour results in a demand for 10,000 worker-hours. Elsewhere the International Brotherhood of Bricklayers union (IBB) faces a situation in which an $18 hourly wage results in a demand for 30,000 worker-hours, whereas a $15 hourly wage results in a demand for 33,000 worker-hours.
1.Which union faces the more inelastic labor demand, the AFB or IBB? Demonstrate and explain.

2.Which union will be more successful in increasing the aggregate income of its membership, the IBB or AFB? Demonstrate and explain.

Answer 1

We need to use mid point elasticity to find which demand is more elastic. We have the following set of information

• Demand information related to American Federation of Bricklayers union: (LD1, W1) = (20,000, 16) and (LD2, W2) = (10,000, 20)
• Demand information related to International Brotherhood of Bricklayers union: (LD1, W1) = (33,000, 15) and (LD2, W2) = (30,000, 18)

Find the own wage elasticity of demand of the two unions

Cases	LD1	LD2	W1	W2	LD1-LD2	(LD2+LD1)/2	%LD	W2-W1	(W1+W2)/2	%W	Ed=%LD/%W
American Federation of Bricklayers union	20000.00	10000.00	16.00	20.00	-10000.00	15000.00	-66.67	4.00	18.00	22.22	-3.00
International Brotherhood of Bricklayers union	33000.00	30000.00	15.00	18.00	-3000.00	31500.00	-9.52	3.00	16.50	18.18	-0.52

a) From the results we see that own wage elasticity of demand is -3.00 for  American Federation of Bricklayers union and -0.52 for International Brotherhood of Bricklayers union. Hence International Brotherhood of Bricklayers union faces an inelastic demand relatively.

b) Total Wage income is the product of wage rate x number of employes. We see that the inelastic the demand for labor is, the higher total wage income is when wage rate is increased because the % rise in wage is greater than % fall in quantity of labor demanded and supplied. Hence as a result total wage income is increased. So International Brotherhood of Bricklayers union will be more successful in increasing the aggregate income of its membership,