Professional Documents
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Problem Set 6. Unions and the Labor Market
1. Some collective bargaining agreements contain “union standards” clauses that prohibit the employer
from farming out work normally done in the plant to other firms that pay less than the union wage.
a. What is the union’s rationale for seeking a union standards clause?
b. Under what conditions will a union standards clause most likely be sought by a labor union?
2. It has been observed that unions in the capitalintensive steel industry were able to negotiate higher
thanaverage wage increases during the very period in which steel output in the United States was
declining. Using economic theory, how can this pattern be explained?
3. American unions often try to win public support for boycotting goods made in less developed countries
by workers who work very long hours at low pay in unhealthy working conditions. (a) If successful,
will these efforts unambiguously help the targeted foreign workers? Explain fully. (b) Will they
unambiguously help the union’s American workers? Explain fully.
4. A certain country has very centralized collective bargaining, under which wage bargains are applied
nationally. This country is thinking about adopting a bargaining structure that is more decentralized,
so that wage bargains will be made at the individual plant or firm level. How would you expect
decentralization to affect wages and employment? Explain your answer.
5. The Brain Surgeon’s Brotherhood faces an ownwage elasticity of demand for its labor that
equals –0.1. The Dog Catcher’s International faces an ownwage elasticity of demand for its labor
that equals –3.0. Suppose that leaders in both unions push for a 20% wage increase, but have no
power to directly set employment levels. Why might members of the Dog Catcher’s International
be more wary of the targeted wage increase?
6. The following table gives the demand for labor in two different firms.
$3 24 28
4 23 26
5 22 24
6 21 22
7 20 20
The current wage rate in both firms is $7 per hour. A union would like to organize employees in one
of the firms and bargain to raise the wage rate to $8 per hour. Calculate the wage elasticity of demand
for each firm if the wage rate were increased from $7 per hour to $8 per hour. Which firm would the
union be more interested in organizing? Why?
7. There are two sectors of the construction industry that currently pay their employees the market
clearing wage. The demand for labor in each sector is MRP L 12 L, where L the number
(in thousands) of workers. The supply of labor in each sector is L W 2, where W wage rate
(dollars per hour).
A union organizes in one of the sectors, and it restricts supply to that sector by insisting that only
those in the union are hired by firms in that sector (and it is difficult to get into the union). When the
employees in this sector unionize, the supply of labor in that sector changes to L W 4.
a. What is the wage rate in both sectors before unionization? How many employees will be hired
in each sector?
b. What is the wage rate in the unionized sector? How many employees will be hired in the
unionized sector?
c. If the unemployed workers in the newly unionized sector spill over into the nonunion sector, what
will be the wage rate in the nonunion sector? How many employees will be hired in that sector?
d. What is the union relative wage advantage? What is the true absolute effect?
8. On January 1, 2008, Germany officially ended the monopoly of Deutsche Post to make letter
deliveries. Assuming most German workers are represented by unions that bargain with individual
firms, analyze how the decision to end Deutsche Post’s monopoly in the postal delivery industry is
likely to affect wages and union power in the German postal industry.
9. In late 2007, the Canadian government charged the major chocolate bar manufacturing companies
with price fixing. The charges allege that the companies met secretly to set prices above the level
that would have prevailed if they had competed. Use economic theory to analyze the effects on the
demand for labor that are associated with price fixing, and analyze how the end of price fixing will
affect union wages in an industry.