Question

You are studying the labour market for financial analysts. The demand curve is given by L=500-w while the supply is L=-40+2w. All workers are members of a union. The union was initially maximizing total wages paid. But due to the increased unemployment, the union decided to maximize employment. By how much did the employment increase due to the changed goal of the union? Provide a calculation and picture.

Answer 1

The demand curve is given by L=500-w and the supply is L=-40+2w. Equilibrium in the labor market occurs when labor demand equals labor supply.

500-w = -40+2w

540=3w

w* = 180 and L* = 320

Function for total wages is given by TW = Ld x wage. The reason why labor demand is used because when union demands a higher wage rate, total employment (by employers) will fall.

Maximize total wage to get TW'(w) = 0

d[(500 - w)w]/dw = 0

500 - 2w = 0

w** = 250 and L** = 250

We therefore see that employment increases from 250 to 320 units of labor due to the changed goal of the union.