Question

Classical economic theory treats unions as monopolies that create inefficiencies in the economy. Explain and illustrate how these inefficiencies are created in both the labour and product markets.

Answer 1

Labour market :

Unions as monopoly in the labour markets is such that all the labours wants to come together and agree to form a business to which they contribute identical sums of money and work for identical wages. But this creates inefficiency due to various reasons. Talking about labour market every labour is physically and performance wise different from each other. Hands creating one single identical device creates inefficiency to some of them. It might be efficient for many. Like some labours are old and some are young and new and hence can work more than the old ones.

For example : the work rules divides the task up in efficiently in such ways to ensure that some work is available for each worker. And to do the same same task even fewer workers needed, means some Union members will have to be cut out of their shares of union Monopoly rents. This creates inefficiency and instability in in political organisations.

Product market:

Monopoly of unions also effect product market, where it clears inefficiency, as consumers demand shift away from relatively higher priced Union produced goods towards low priced goods produced by non Union workers. Also in the other way the notion of the superior worker affects which tell that the higher wages paid by union firms will cause workers to give up for this good Union jobs creates another inefficiency.