Consider an economy which is divided into different sectors, each producing a differentiated product. Workers in each sector are organized in a trade union which monopolizes the supply of labour to all firms in the sector. Because of its monopoly position, the trade union in each sector may dictate the nominal wage rate to be paid by employers in that sector. However, employers are free to choose the level of employment. For simplicity, assume that the number of working hours for the individual worker is fixed, so total labour input is proportional to the number of workers employed. Workers in sector are educated and trained to work in that particular sector, so they cannot move to another sector to look for a job. If a worker fails to find a job in his sector, he therefore becomes unemployed. His real income will then be equal to the real rate of unemployment benefit
Consider an economy which is divided into different sectors, each producing a differentiated product. Workers in each sector are organized in a trade union which monopolizes the supply of labour to all firms in the sector. Because of its monopoly position, the trade union in each sector may dictate the nominal wage rate to be paid by employers in that sector. However, employers are free to choose the level of employment. For simplicity, assume that the number of working hours for the individual worker is fixed, so total labour input is proportional to the number of workers employed. Workers in sector are educated and trained to work in that particular sector, so they cannot move to another sector to look for a job. If a worker fails to find a job in his sector, he therefore becomes unemployed. His real income will then be equal to the real rate of unemployment benefit
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter14: Labor Markets And Income
Section: Chapter Questions
Problem 2SCQ: Table 14.11 shows levels of employment (Labor), the marginal product at each of those levels, and a...
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- Consider an economy which is divided into different sectors, each producing a differentiated product. Workers in each sector are organized in a trade union which monopolizes the supply of labour to all firms in the sector. Because of its
monopoly position, the trade union in each sector may dictate the nominal wage rate to be paid by employers in that sector. However, employers are free to choose the level of employment. For simplicity, assume that the number of working hours for the individual worker is fixed, so total labour input is proportional to the number of workers employed. Workers in sector are educated and trained to work in that particular sector, so they cannot move to another sector to look for a job. If a worker fails to find a job in his sector, he therefore becomes unemployed. His real income will then be equal to the real rate ofunemployment benefit . An employed worker in sector earns the real wage where is an index of the general price level, so his net income gain from being employed is . The trade union for sector cares about this real income gain for its employed members, but it also cares about the total number of jobs secured for the membership. Assume that the union sets the nominal wage with the purpose of maximizing a utility function of the form:
subject to
The representative employer in sector uses a technology described by the production function:
where is the volume of real output produced and sold in sector , and is a productivity parameter. The employer representing industry produces a differentiated product and therefore has some monopoly power, and hence faces a downward-sloping demand curve of the form:
where is the
- Derive the price-setting equation and show that the firm always sets its prices as a constant mark-up over marginal cost. Provide an intuitive account.
- Derive the labour demand function for sector . What is the relationship between numerical real wage elasticity of labour demand at the sectoral level and price elasticity for sectoral output demand? Give an intuition account behind this relationship.
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where Y, is the volume of real output produced and sold in sector i, and B is a productivity
parameter. The employer representing industry i produces a differentiated product and therefore
has some monopoly power, and hence faces a downward-sloping demand curve of the form:
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where Y is the aggregate output from all the n sectors, hence is the market share captured by
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11
(a) Derive the price-setting equation and show that the firm always sets its prices as a constant
mark-up over marginal cost. Provide an intuitive account.
(b) Derive the labour demand function for sector i. What is the relationship between numerical
real wage elasticity of labour demand at the sectoral level and price elasticity for sectoral
output demand? Give an intuition account behind this relationship.
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(1) Consider an economy which is divided into a different sectors, each producing a
differentiated product. Workers in each sector are organized in a trade union which
monopolizes the supply of labour to all firms in the sector. Because of its monopoly
position, the trade union in each sector may dictate the nominal wage rate (W) to be
paid by employers in that sector. However, employers are free to choose the level of
employment. For simplicity, assume that the number of working hours for the
individual worker is fixed, so total labour input is proportional to the number of workers
employed. Workers in sector i are educated and trained to work in that particular sector,
so they cannot move to another sector to look for a job. If a worker fails to find a job
in his sector, he therefore becomes unemployed. His real income will then be equal to
the real rate of unemployment benefit b. An employed worker in sector i earns the real
wage w=where P is an index of the general price level, so his net income gain
from being employed is w b. The trade union for sector i cares about this real
income gain for its employed members, but it also cares about the total number of jobs
L, secured for the membership. Assume that the union sets the nominal wage with the
purpose of maximizing a utility function of the form
maxſ = (w₁ − b)L", n>0
subject to L, = L;(w;)
The representative employer in sector i uses a technology described by the production function:
Y=BL¹, 0> œ>1
where is the volume of real output produced and sold in sector i, and B is a productivity
parameter. The employer representing industry i produces a differentiated product and therefore
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