Question

2. Suppose the economy consists of a union and a non-union sector. The labor demand curve in each sector is given by E^d= 5,000 – 20W. The total (economy-wide) supply of labor is 5,000 and it does not depend upon the wage (labor supply is perfectly inelastic). All workers are equally skilled and equally suited for work in either sector. A monopoly union sets the wage at $200 in the union sector.

a) How many workers will be employed in the union sector?

b) How many workers will be employed in the non-union sector, and how much will they earn

c) What is the union relative wage advantage (the union premium) as a proportion of the non-union wage

d) What would the wage be in each sector if unions were outlawed?

Answer 1

Solution :

( a )

Given,

Wage ( W ) = $200

• Labor Demand = 5000 - 20W

= 5000 - 20 ( 200 )

= 5000 - 4000

= $1000

( b )

At Equilibrium,

• Labor Demand = Labor Supply

​​​​​​​→ 5000 - 20W = 5000

→ 20W = 0

W = 0

• Labor Employed = 5000

​​​​​​​( c )

As a propotion of the non-union wage,

Union relative wage is 200% of non union wage = 0 * 200% = $0

( d )

If unions were outlawed , Wages in each sector will be $50