Question

Exercise 2. Wage setting, labour demand and unemployment 1. Explain why union wage claims are moderated by a higher price elasticity in the representative firm's product demand curve. 2. In the text we found that the wage elasticity of labour demand is higher at the sectoral level than at the aggregate level. Explain why this is so. 3. 'Tougher product market competition will reduce structural unemployment'. Explain this state- ment. Discuss what the government could do in practice to promote fiercer product market competition.

Answer 1

Answer to first question is provided :

1) When the price elasticity of demand for the product is high , it means that small changes in product price can cause huge changes in quantity demanded . This means that if cost of production rises due to high union pressure , then price of product will rise . This will lead to very high fall in demand for the product and total revenue will fall . This will ultimately lead to cut down in profit margin and hence lay off of workers . So union wage claims are moderated because stringent claims can ultimately lead to job loss .