Suppose the federal government allows labor unions to act as the sole seller in labor markets, but the government collects a $1 per hour fee to cover unemployment insurance for each union worker. Assuming this fee is not so large that it forces the unions to disband, what is the impact of this fee on the equilibrium wage and employment level in the monopolized labor market?
A) After-tax wages and employment decline.
B) After-tax wages increase and employment declines.
C) Employment increases and after-tax wages decline.
D) No change in after-tax wages or employment levels.

Question

Quizplus · Accepted Answer

The $1 per hour fee effectively acts as a tax on labor, which increases the cost of employing each worker. In a monopolized labor market, where the union acts as a monopoly seller of labor, this increased cost is likely to be shared between the employer and the employees. The union will have to accept a lower wage to keep employment levels from falling drastically, but some reduction in employment is also likely because the higher cost of labor makes it less attractive for employers. Thus, after-tax wages and employment both decline.

Suppose the Federal Government Allows Labor Unions to Act as the Sole