Microeconomics Study Set 47

Business

Quiz 25 :
Do Labor Unions Increase the Wages of Workers?

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Quiz 25 :
Do Labor Unions Increase the Wages of Workers?

If the union increases the wages of the farm workers above the competitive market: a) Increase in the wage of worker leads to the increase in the cost of production of Florida oranges, price will rise in the long run because the supply of oranges will fall. b) Higher cost of production will decline the profits of the Florida orange growers in the short run, but they will be able to earn normal profit in the long run. c) Mechanization will be encouraged because it will increase the productivity of labors and hence their wages. d) The employment of migrant farm workers will decline mainly in the long run.

a) Assuming that the ultimate goal of any union of labor is to increase the wage of workers. There are four major conditions in which a union will be able to achieve its objective or target, these conditions are as follows: i) Availability of Substitute: If there is no single substitute input available for unionized labor for the production of goods and services, then union becomes more powerful to bargain with the firm, because non-availability of substitute input makes the demand for labor more inelastic. ii) Elasticity of Product Demand: As we know that wages are the main components of cost production of goods and services. An increase in the wage will surely increase the cost of production which ultimately increases the price of goods and services produced by the union labor. Hence, if the union wants to increase the wages, the demand for goods produced by them should be inelastic. iii) Unionized labor as a share of the Cost of Production: If the unionized workers create only a little share of the total cost of production of a product, then the demand for the labor will become more inelastic. In this situation union can bargain to increase the wages. iv) Supply Elasticity of Substitute Inputs: If the supply of substitute inputs is inelastic then the price will increase in response to an increase in demand. Hence, the higher price will reduce the demand of substitute inputs. On the other hand, inelastic supply of substitute input will make the union more powerful by making the demand inelastic for union labor. b) If the union wants to increase the wages of its member workers without the significant reduction in employment, then the demand should be inelastic for the labor union. The strength of union will enhanced if: i) There is no substitute available for the union labor in the market to produced identical goods and services. ii) The demand should be inelastic for the goods and services produced by the unionized labor. iii) The unionized workers create only a little share of the total cost of production of a product, and then the demand for the labor will become more inelastic. In this situation union can bargain to increase the wages. iv) The supply of substitute input should be inelastic. As the inelastic supply of substitute input will make the union more powerful by making the demand inelastic for union labor. Hence, in the absence of any above condition might make union unable to meet its goal.

If the union is not able to unionize all the firms of an industry, and the union increase the wages of the unionized firms, then it will increase their cost of production and make it difficult for them to compete with non-union competitors effectively in the market. Hence, the union will not be able to increase wages much without knowing a substantial decrease in the employment of its members.

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