Problem Set
Problem Set 5—Labor Unions ECP3203: Labor Economics Instructions: Answer all parts of each of the following questions. Each part of a question is worth 1 point. Question 1 Consider a two-sector economy with homogeneous labor and jobs in both sectors. Two million workers supply their labor perfectly inelastically. Labor demand in both sectors can be written as: E1 1, 800, 000 100, 000 w1 and E 2 1, 800, 000 100, 000 w2 . a. If both sectors are competitive, what is the market-clearly wage and how many workers are employed in both sectors? b. Suppose a labor union forms in Sector 1. The union negotiates a wage of $12 per hour, and firms choose how much labor to employ. Anyone not employed in Sector 1 is relegated to Sector 2. How many workers will be employed in Sector 1 (unionized)? How many workers will be employed in Sector 2, and what wage will they receive? c. What is the union-wage gap in Part (b)? What would the union-wage gap be if one controlled for the spillover effect? [Hint: controlling for the spillover effect means to compare the union wage with the competitive wage that would have occurred in the absence of the union (Part a.)]. Question 2 At the competitive wage of $20 per hour, Firms A and B each hire 5,000 workers (each working 2,000 hours per year). The elasticity of demand is −2.5 and −0.75 at Firms A and B, respectively. Workers at both firms then unionize and negotiate a 12% wage increase. Note: the elasticity of labor demand is calculated as the percentage reduction in employment divided by the percentage increase in wage. Also, assume that the reduction in employment is achieved by reducing the number of workers hired and not by reducing the number of hours worked by each worker. a. What is the employment effect at Firm A? What number of work-hours per year will Firm A employ after the wage increase? How has total worker income at Firm A changed? Worker income is calculated as the number of work-hours times the wage rate. b. What is the employment effect at Firm B? What number of work-hours per year will Firm B employ after the wage increase? How has total worker income at Firm B changed? 1 c. How much would the workers at each firm be willing to pay in annual union dues to achieve the 12% gain in wages? Question 3 Consider the figure below and the contract curve discussion from lecture. a. Does Point P represent the firm or the workers having all of the bargaining power? Does Point Z represent the firm or the workers having all of the bargaining power? Explain? b. In what sense are the points on the contract curve PZ efficient? In what sense are these points inefficient? c. Now suppose that the union has the power to be a monopoly union in setting wages if it chooses, but it does not have the power to force a wage and an employment level on the firm. What wage will the union choose? How does employment at this wage compare to employment at the competitive wage w*? 2 Question 4 Consider the following data on union versus nonunion wage and fringe benefit compensation. Union Workers Nonunion Workers Average Hourly Wage $21.91 $17.66 Average Hourly Fringe Benefit $13.69 $6.85 Total Hourly Compensation $35.60 $24.51 Calculate the union effect (meaning the percentage increase) for hourly wages, hourly fringe benefits, and total hourly compensation. What might you infer from the various union-negotiated effects? 3
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