Question

3. Working with Numbers and Graphs Q3 Consider an economy with only two sectors: manufacturing and service. Both sectors are perfectly competitive, and labor is homogeneous. Assume that changes in the labor market do not affect the product demand curve in either sector. Suppose a union forms in the service industry. The union limits its membership to fewer than the number of workers employed before the union formed and forces all employers in the industry to hire only union workers. Show the effect of unionization on the labor market of the service industry.

Answer 1

As union membership is limited to only a few workers and firms in service industry can only hire union workers, supply of workers in the service industry falls. This shifts the labor Supply curve to the left, leading to an increase in wage rate and decrease in labor employment.

All the workers displaced from the Service industry enter the manufacturing industry. This increases the supply of workers in the manufacturing industry, shifting the supply curve to the right. Keeping demand unchanged, this leads to a fall in wages and increase in employment in the manufacturing industry.

Correct option: falls

Required graphs are below:

WE الا را (SERVICE) (MANUFACTURE)