Suppose a labor market has perfectly inelastic supply that is composed of union and non-union workers, and there is wage discrimination in the union and nonunion sectors. If the union shifts its policy from maximizing total economic rents to maximizing total wages earned by members, what happens to the equilibrium employment level and wage for non-union workers?
A) Both increase.
B) Employment increases and wage declines.
C) Wage increases and employment declines.
D) Both decline.

Question

Quizplus · Accepted Answer

If the union shifts its policy from maximizing total economic rents to maximizing total wages earned by members, this would result in an increase in wages for union workers. As the labor market has perfectly inelastic supply, this increase in wages for union workers would not result in an increase in employment level. Instead, it would lead to a decrease in demand for non-union labor, resulting in a decline in employment for non-union workers. This would also lead to an increase in the wage discrimination gap between the two sectors, with wages increasing for union workers and declining for non-union workers. Therefore, the equilibrium employment level would decline while wages for non-union workers would increase.

Suppose a Labor Market Has Perfectly Inelastic Supply That Is