Assume that the union wage already exceeds the market-clearing wage. If the union wage is increased, holding other factors constant, then the number unemployed ______ and the number employed _____.
A) increase; increases
B) increases; decreases
C) increases; does not change
D) decreases; increases

Question

Quizplus · Accepted Answer

If the union wage already exceeds the market-clearing wage, then increasing the union wage will make it even higher relative to the market-clearing wage. This will cause firms to hire less labor and possibly lay off some workers, resulting in an increase in the number of unemployed (hence the increase in option B) and a decrease in the number of employed (hence the decrease in option B).

Assume That the Union Wage Already Exceeds the Market-Clearing Wage