Question

Paul Douglas suggested that the wage rate differential between unionized and non-unionized sectors:

Increases dramatically at the time of unionization, then tends to decline beyond that point

Increases only slightly at the time of unionization, and converges gradually beyond that point

Increases dramatically at the time of unionization, then tends to diverge gradually beyond that point

Increases only slightly at the time of unionization, but diverges rapidly beyond that point

Increases dramatically at the time of unionization, then remains relatively constant beyond that point

Answer 1

Paul Douglas in his studies on differential in the wage rate in unionized and non-unionized sectors during 1930s has stated that initially when union is formed then wage rate of unionized sectors rises dramatically.

However, overtime, as Union get settled down and labor market constraints steps in wage rate differentials between two sectors started decreasing.

So,

It can be stated that the wage rate differentials between unionized and non-unionized sectors increases dramatically at the time of unionization then tends to decline beyond that point.

Hence, the correct answer is the option (1).