Quiz 10: Labor Unions


The slope of indifference curve and the value of the slope of workers' demand curve are taken in to the account while measuring the utility. The following is a measurement of the wage rate that would be demanded by a union. img The given slope is 0.01. Inserting the labor demand function instead of E , img After solving, the above equation indicates that a monopoly union is likely to demand a wage rate of $10. At the wage rate of $10, the employers will hire 1,000 workers to maximize its output.

The following factors caused reduction in the unionism in the private sector in US since the mid-1960s: • The use of yellow-dog contract by employers: - According to this contract, new employees were prohibited from joining labor unions. Prohibition on joining the labor unions led to a decline in the private-sector unionism in the United States. • In private sector, wages of the employees started rising significantly during mid-1960. An increase in the level of wages caused a decrease in the unionism in the private sector. • Corruption by the union leaders: - Corruption by the union leaders reduced the faith among union members. So, the new joiners preferred not to join labor unions. The following factors caused a rapid increase in the unionism in the private sector in US during the mid-1960s: • Before 1960, labor in public sector was prohibited from establishing new unions, but during 1962, they were allowed to do so. This has caused a rapid increase in the public sector unionism. • Right to organize gave freedom to the workers for forming organizations in the United States. They could freely form unions without having to worry about being stopped from doing so.

a) A Monopoly determines the number of workers to be employed by the point of tangency between the labor demand curve and the utility curve of the union. This implies, at the point of equilibrium, the slope of the labor demand curve and the slope of the indifference curve should be equal. The slope of the given labor demand curve is 0.01E. The slope of the utility function is the ratio of marginal utilities of wage increase and employment: img Given the competitive wage rate w* = $8 per hour, the slope of the utility function becomes img . First equilibrate the two slopes and note that: img Use the labor demand curve and the equation found before to compute the wage as demanded by the monopoly union: img Hence the monopoly union would demand a wage rate of $14. Under this union contract, as much as 600 workers will be employed. b) Previously, the union had demanded $10 as a wage rate and at that wage rate, 1,000 workers were hired by the firm. The results are different because when the union has a utility that depends on the competitive wage rate, union observe that the demand curve is more inelastic and they can demand a high wage rate.

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