Question 7 There are approximately 120000000 workers in the

Question 7. There are approximately 120,000,000 workers in the US. Assume that if unions did not exist, each of these workers would earn $25,000. Suppose initially a union is successful in organizing 20 percent of these workers. After recent negotiations, it manages to obtain a 10 percent wage increase for its members. Using these facts and assuming that the elasticity of labour demand is -1.0, calculate: a) The number of union and non-union workers in the economy under the assumptions that: i) all workers who are not employed in the union sector are employed in the non-union sector, and, alternatively, i) union members who do not obtain union jobs remain unemployed. b) The average wage in the union and non-union sectors under each assumption. c) The relative change in overall employee compensation resulting from unionization under each assumption. d) The efficiency loss under each assumption (see slide on \"Unions and Market Efficiency\" and the corresponding discussion in Borjas, Chapter 11).

Solution

a)i) given total number of worker=120.000,000

if 20% belong to union sector, the number of union workers=20%*120,000,000=24,000,000

however, since elasticity of labour demand is -1, it can be said that with a 10% hike in wages, 10% of the labourers in the union sector are unemployed.

Unemployed workers in the union sector=10%*24,000,000=2,400,000

Union sector employed workers=24,000,000-2,400,000=21600000

the number of non-union workers=120,000,000-21600000+2400000=100,800,000

ii)number of non-union workers=120,000,000-21600000=98,400,000

b)average wage in the union sector=25,000*10%+25,000=$27,500

average wage in the non-union sector(if union sector\'s unemployed workers do not join non-union workers)=$25,000

(if they join) around 2,400,000 workers will join 98,400,000 workers which is around 41% increase in the number of workers,a -1 elasticity of labour demand shows that with an increase in 41% labour demand the wages paid to non-union workers will fall by 41%. The new wage will be 25,000*(41%*25000)=$14750

c)This non unionized workers will have lesser incentive to work whereas the workers in the union sector who are employed will have higher effeciency due to better pay. However, those unemployed by the union sector will receive no pay at all.