Answer to Question #139667 in Macroeconomics for AH zhuan

Question

Assume a union is established in one market, graphically illustrate the effect of the union on the market in which it is formed when the union has successfully negotiate a raise of wage above the equilibrium level.

Answer 1

When the wage is above WE, it implies that more eligible workers will look for employment which in turn will surpass the demand laborers by firms which when they hire will still make a normal profit. Consequently, firms will be forced to adjust downwards the wages for the employees in order to obtain employment in the industry. If labour markets are competitive, unions will raise wages but reduce the level of employment. 

 It bargains for a wage of WU. The union wage flow changes the labour supply schedule to WuELs, as in the diagram below. Im­portantly, the new MC curve of labour is equal to Wu up to Lu workers.