Suppose a labor market has perfectly inelastic supply that is composed of union and non-union workers, and both groups of workers initially earn the perfectly competitive wage. What happens to the equilibrium employment level and wage for union workers if the union exercises its bargaining power?
A) Both increase.
B) Employment increases and wage declines.
C) Wage increases and employment declines.
D) Both decline.

Question

Quizplus · Accepted Answer

When the union exercises its bargaining power, it negotiates a higher wage for its members. As a result, the wage for union workers increases, but employment declines because firms will hire fewer union workers at the higher wage. The non-union workers do not benefit from the higher wage, and their equilibrium wage and employment level stay the same. Therefore, the equilibrium employment level for union workers declines, while their wage increases.

Suppose a Labor Market Has Perfectly Inelastic Supply That Is