Economics Study Set 20

Business

Quiz 39 :
Do Labor Unions Increase the Wages of Workers?

Quiz 39 :
Do Labor Unions Increase the Wages of Workers?

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Suppose that Florida's migrant workers are effectively unionized. What will be the effect of the unionization on (a) the price of Florida oranges? (b) the profits of Florida fruit growers in the short run and in the long run? (c) the mechanization of the fruit-picking industry? (d) the employment of migrant farm workers?
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The labor union is the organization of labor working in either same occupation or in same industry. The job of the labor union is to engage in collective bargaining with the employer about wage rate, working condition, and other elements of employment. The labor union shields their members from the greed of the employer and sometimes exploits its monopoly power to influence a wage rate that leads to decrease in wellbeing of non-union workers, consumers and economy.
a) The effectiveness of a union depends on the availability and elasticity of demand of substitute input. The elasticity of product demand and share of unionized labor as a share of total cost. If any industry is effectively unionized then the union can bargain to increase the wage rate for union workers. This will drive the production cost higher. The increase in cost will be reflected in the price of the good. Thus, the price of the good will increase. Thus, if Florida migrant workers are effectively unionized, any bargain in favor of increase in wages will increase the price of the Oranges.
b) As the wage rate of employee's increases, facing the higher wages employers cut back some production. This decreases the supply of the good unless the demand for good is perfectly inelastic. The rise in cost and decrease in supply decreases the profit of the good. Thus, the profit of the unionized industry falls in the short run. In the long run resources are shifted from low profit industry to high profit industry and the growth and employment of the unionized sector will be reduced in the long run.
c) As the labor will be expensive and short run, the producer will substitute labor for less expensive input, like machine. Thus, the effective unionization will increase the mechanization of fruit picking industry.
d) As the wage rate of employees increases, facing the higher wages employers cut back some production. This decreases the supply of the good unless the demand for good is perfectly inelastic. The rise in cost and decrease in supply decreases the profit of the good. Thus, the profit of the unionized industry falls in the short run. In the long run resources are shifted from low profit industry to high profit industry and the growth and employment of the unionized sector will be reduced in the long run. As the labor will be expensive and short run, the producer will substitute labor for less expensive input, like machine. Thus, the employment of the migrant worker will decrease.

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Assume that the primary objective of a union is to raise the wages of its members. a. Discuss the conditions that will help the union achieve this objective. b. Why might a union be unable to meet its goal?
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The labor union is the organization of labor working in either same occupation or in same industry. The job of the labor union is to engage in collective bargaining with the employer about wage rate, working condition, and other elements of employment. The labor union shields their members from the greed of the employer and sometimes exploits its monopoly power to influence a wage rate that leads to decrease in wellbeing of non-union workers, consumers and economy.
a) The primary objective of the labor union is to increase the wage rate. To achieve this goal the union can adopt either of the three ways:
1) Supply restriction : the union can restrict the supply of labor into the industry. The successful tactics can reduce the supply of labor into the industry. The reduce supply can increase the wage rate of the labor.
2) Bargaining power : if the union has substantial economic power, strike of a small portion of the labor can halt production. If the union can stop the other potential worker to offer their labor the output of the firm will decrease. This will put the union in advantageous position and will increase the wage rate above equilibrium free entry rate.
3) Increased demand : the union can influence the demand for union labor by appealing to the consumer to buy goods produced by union labor. Sometimes the union uses their political power to restrict the entry of non-union firm and foreign firm to enter into the industry. This drives the demand for union product and, thus, demands for union labor high. A higher demand for union labor increases the wage rate of the union labor.
b) However, these tactics cannot be fulfilling if any on the following four conditions hold:
1) If there are good substitute for the union labor the producers will substitute the alternative for union labor. This is because a rise in wage of the union labor will increase the cost of production. As the producers shift to low cost alternative the bargaining for higher wages will decrease the demand and employment of union-labor.
2) If the good produced by the union worker compete with other substitutes produced by non-union labor and foreigners, then a bargain to increase wage will not be fruitful. The increase in wage rate will increase the cost of the production and the price of the union good. This will decrease the competitiveness of the union good and this will decrease the market share of unionize goods. As a result, the employment in these firms will decrease substantially.
3) If the unionize labor cost is the larger share of the cost bear by the producers, a increase in wage will increase the cost of production substantially and the firm will lose the profit. Hence, the employment in the firm will fall substantially and the labor union cannot raise the wage substantially.
4) Finally if the supply of the substitute input is relatively elastic, then the supply of the input will be relatively greater at lower cost. This will prompt the producer to switch to a low cost option and the bargaining for higher wages will not be fruitful.
In the end it can be said that it is not the labor union that increases the wage rate but the increase in productivity of a worker increases the wage rate of the labor, union or non-union alike.

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"If a union is unable to organize all the major firms in an industry, it is unlikely to exert a major effect on the wages of union members." Indicate why you either agree or disagree.
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The labor union is the organization of labor working in either same occupation or in same industry. The job of the labor union is to engage in collective bargaining with the employer about wage rate, working condition, and other elements of employment. The labor union shields their members from the greed of the employer and sometimes exploits its monopoly power to influence a wage rate that leads to decrease in wellbeing of non-union workers, consumers and economy.
If the part of the industry is unionized, then a demand for increase in wages will increase the cost of the production and the price of the union good. This will decrease the competitiveness of the union good and this will decrease the market share of unionized goods. As a result, the employment in these firms will decrease substantially. The union will be unable to increase wages without reducing the employment of the firm.

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Evaluate the following statements. a. "An increase in the price of steel will be passed along to consumers in the form of higher prices for automobiles, homes, appliances, and other products made with steel." Do you agree or disagree? b. "An increase in the price of craft union labor will be passed along to consumers in the form of higher prices of homes, repair and installation services, appliances, and other products that require craft union labor." Do you agree or disagree? c. Are the interests of labor unions in conflict primarily with the interests of union employers? Explain.
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"Unions provide the only protection available to working men and women. Without unions, employers would be able to pay workers whatever they wanted." True or false?
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A survey of firms in your local labor market reveals that the average hourly wage rate of unionized production workers is $1.50 higher than the average wage rate of nonunion production workers. Does this indicate that unionization increases the wage rates of workers in your area by $1.50? Why or why not?
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Even though the wage scale of union members is substantially greater than the minimum wage, unions have generally been at the forefront of those lobbying for higher minimum rates. Why do you think unions fight so hard for a higher minimum wage?
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