Question

Use a single graph to show an economy initially consists of two jobs for equally skilled workers. Then discuss and show on this single graph the impact of the unionization of just one of these firms. Be sure to show and explain the union wage gap as well as the efficiency loss to society from unionization.

Answer 1

From the graph, first we focus on the usual supply and demand curves. Assuming it is the same for both the firms. The equilibrium supply and demand for labour and wage is given by L* and W* respectively.

Now in the firm where there is unionization, a minimum wage has to be properly implemented. Assuming this minimum wage i.e. the price floor to be above the equilibrium wage level. This results in wage going up but also JOB LOSS as seen in the graph.

Unemployment is shown by Ld - Ls

Without Wage Floor, THE TOTAL SURPLUS IS THE COLORED PORTION SHOWN IN THE GRAPH BELOW. The coloured triangle below the W* is PRODUCER SURPLUS. The coloured triangle above W* is CONSUMER SURPLUS.

With Minimum wage arising because of unionization, PS is shown in light purple in graph below. CS is deep blue. Dead weight Loss arising is shown by Orange colour. In comparison with the previous graph, it is clearly visible that area of total surplus falls. Thus efficiency is lost in society.

[NOTE :

Consumer Surplus is defined as the difference between a price a consumer is willing to pay and the price he/she actually pays.In a graph, it is given by the area above the price line and below the demand curve.

Producer Surplus is defined as the difference between a price a producer demands and the price he/she actually receives. In a graph, it is given by the area below the price line and above the supply curve. ]