Question

16. Draw and label a supply and demand diagram for the labor market. Then Awnser question below

What is the effect of an increase in the minimum wage on the number of workers demanded? _______________ the number of workers supplied? _________________ the amount of unemployment?

17. What is a labor union and collective bargaining?_____

18. How do unions affect the unemployment rate if they raise union wages? ______

19. What is efficiency wage theory?_____

20. What are the reasons that explain why a firm may want to pay efficiency wages?______

Answer 1

16)

Fig 1 shows market equilibrium in labour market.

fig 1

If minimum wage is increased , such that it becomes greater than equilibrium price in the labour market then it is said to be binding which implies overall wage at which labour is employed increases . As we can see in the figure 1 , the demand for labour is inversely related to wage , hence when the overall wages increases ,number of workers demanded falls.

And supply of workers increases with the increase wages as shown in fig 1.Therefore, increase in minimum wages led to an increase in number of workers supplied

Unemployment = workers supplied- workers demanded

Since workers supplied increases and workers demanded decreases , unemployment increases.

17) Labour union is an organisation that represents the collective interests of employee.Labour unions helps workers to unite to negotiate with employers over wages , working hours and other working conditions.

Collective bargaining is a key means through employers and their organisations and labour unions establishes fair wages and other working conditions.

18)If labour unions raises the employment wages greater than the equilibrium wage rate, employers will react by laying off workers or by not employing any more . This is because demand for workers depends has an inverse relationship with the wages.

Whereas, the supply of workers increases with the increase in wage because higher wages encourage workers to supply more labour. That is why supply curve is upward sloping.

This widening gap between supply of labour and demand due to increase in wages increases unemployment.

19) According to the efficiency wage theory , firms works more efficiently if they pay workers wages above equilibrium wage in the labour market.

20)

Firms -such as high-tech firms, see employees morale and commitment as essential to the quality of their work and so they pay more than firms in sectors where worker's activities are more routine.

And also they ensure by doing so that the highly skilled workers chooses their firms over others

Firms invests substantial amount in training the newly recruited worker and they would definitely want to retain them so they offer to pay more.