Answer to Question #207524 in Macroeconomics for jai

Question

Q) a. Suppose that there is an excess supply of economics professors. Should universities necessarily reduce salaries? What does standard economic theory suggest? What does efficiency-wage theory suggest (Explain with diagram). [4 marks]

b. Briefly describe how labor unions can affect wages in non-unionized industries. [3 marks]

Answer 1

a.

As there is excess supply of economics professor in the economy it would lead to an disequilibrium. 

Thus the standard economic theory suggests that as the excess supply in the market lead to a change in the equilibrium point the Universities should necessarily reduce the salaries/wages of the economics professor in order to stay at the equilibrium level in the economy. Following below is the graph depicting the same:

W1 here should be the wage rate here as per the standard economic theory.

Although the efficiency wage theory suggests that in order to make the professors more productive and more efficient the universities should pay its professors more than the market wage rate. Thus in order to keep them. Following is the graph depicting the same:

W2 here should be the wage rate as per the Efficiency wage theory.

b.Unions ensure there is wage equality to everyone because it raises wages for middle and low class workers. It affect the wages on non unionized union since it sets the wage that people should work for.