The following gives labor supply and demand data for the widget industry. Wage L
ID: 1122369 • Letter: T
Question
The following gives labor supply and demand data for the widget industry.
Wage
Labor Demand
Labor Supply
$8.00
1680
1680
$8.20
1640
1690
$8.40
1600
1700
$8.60
1560
1710
$8.80
1520
1720
$9.00
1480
1730
a) What are the competitive equilibrium wage rate and employment levels?
b) Suppose the United Widget Workers are considering a strike to increase wages form the current union wage of $8.40. What is the cost in terms of lost employment for each $0.20 wage increase?
c) The union is considering a strategy of seeking the wage rate which maximizes the total wage bill. Again suppose the current union wage is $8.40. Calculate the elasticity of demand if the union raises the wage $0.20 and if they reduce the wage by $0.20. Given these elasticities, are the unions likely to continue trying to maximize the total wage bill? Why or why not?
d) Suppose the union decides instead to try to maximize employment and union membership. At what wage rate will this be achieved? (Assume the supply curve represents the supply of union labor). Why is this not an appropriate goal?
Wage
Labor Demand
Labor Supply
$8.00
1680
1680
$8.20
1640
1690
$8.40
1600
1700
$8.60
1560
1710
$8.80
1520
1720
$9.00
1480
1730
Explanation / Answer
a) equilibrium wage and equilibrium employment is the point where demand for labout = suplly of labour
from the above table, we can see that labor demand = labor supply = 1680 and wage is $8
Equilibrium employment = 1680 hours of labour
Equlibrium w = $8
b) Suppose the United Widget Workers are considering a strike to increase wages form the current union wage of $8.40. The cost in terms of lost employment for each $0.20 wage increase will be 10 hours of labour
c) . Elasticity of labour demand measures the responsiveness of demand when there is a change in the wage rate.
Wage elasticity of demand = % change in labour demand / % change in wage
% change in labour demand = ((new demand – old demand)/old demand)*100
% change in labour wage = ((new wage – old wage)/old wage)*100
We have, old wage = $ 8.4, new wage = $ 8.6
(Old) demand at this wage = 1600 and new demand = 1560
Put these values in formula
Wage elasticity of demand = % change in labour demand / % change in wage
% change in labour demand = ((1560-1600)/1600)*100 = -2.5
% change in wage = ((8.6-8.4)/8.4)*100 = 2.38
Therefore, wage elasticity of demand = % change in labour demand / % change in wage
Wage elasticity of demand = -2.5/2.38 = -1
Absolute value of wage elasticity of demand = 1 when wage increases form $8.4 to $8.6
Demand is unit elastic
Similarly, if wage decreases by $0.20,
We have, old wage = $ 8.4, new wage = $ 8.2
(Old) demand at this wage = 1600 and new demand = 1640
% change in labour demand = ((1640-1600)/1600)*100 = 2.5
% change in wage = ((8.2-8.4)/8.4)*100 = -2.38
Wage elasticity of demand = -2.5/2.38 = -1
Absolute value of wage elasticity of demand = 1 when wage increases form $8.4 to $8.2
Demand is unit elastic
If union seeks to maximize the total wage, then it should negotiate the wage rate at which the elasticy of demad for workers is 1. Since he elasticy of demad for workers is 1 in our case, workers will not try to maximize the wage bill.
d) Suppose the union decides instead to try to maximize employment and union membership, it should decide the wage rate at 8 . At wage equals to $8, labour demand is the maximum. in this way, the wage would be the lowest and wage bill willot be maximized. There will be no bargaining power.
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