2. Labor union strategies Consider the demand for labor in an industry in which

Question

2. Labor union strategies Consider the demand for labor in an industry in which workers are represented by a strong, inclusive union. Assume the union has all of the bargaining power during wage negotiations. Specifically, assume the union determines the wage in the market, and then firms choose how many workers to hire given the labor demand curve. The following graph shows the labor demand curve in this market-that is, the number of workers firms are willing to hire before the union undertakes any wage negotiations. Use the following graph to answer the questions that follow. Your work with the graph will not be graded

Explanation / Answer

Notice in the graph at wage rate of $4, the demand is of 12 thousands of workers,at wage rate of $8 demand is of 8 thousands of workers and at wage of $12 the demand is 4 thousand loabors.

Tota wage = wage rate * number of labors demanded at the rate.

Thus,

at wage = $4, total wage = $4*12 = $48 thousand

and at wage = $8, total wage = $8*8 = $64 thousand

at wage=$12, total wage = $12*4 = $$48 thousand

Now to calculate elasticity use the given formula-

Elasticity at wage of $4 = (demand at wage $4 - demand at wage $8) / $4-$8 = (12-8)/(4-8) = -4/4 = -1

as absolute value of elasticity is 1,which is greater than 0, demand is unitary elastic at wage $4.

Similary, elasticity at wage of $12 = (demand at wage $8 - demand at wage $12) / $8-$12 = (8-4)/(8-12) = -4/4 = -1

as absolute value of elasticity is 1 which is greater than 0, demand is elastic at wage $12.

Hence,

If demand is inelastic it implies that with a percentage increase in wage rate the percentage decrease in demand will be less. Hence with inelastic demand when wage rate rises there will be not less total. Thus with inelastic demand, the union should increase the wage rate.

But if it is elastic then an increase in wage rate will cause much more than percentage decrease in demand hence decreasing the total wage. Therefore if ;labor demand is elastic the union should decrease union wage rate.

Wage Quantity of labor Total income elasticity 4 12 48 elastic 8 8 64 unit elastic 12 4 48 elastic

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