FIGURE 2 The effects of the union wage advantage on the allocation of labor. (a) The higher wage rate W, obtained by unions in the union sector displaces N, – N, workers and reduces output by area A + B+ C. (b) The displaced workers from the union sector are reemployed in the nonunion sector, where employment increases from N, to N, and the wage rate declines from W, to W. Output increases by area D+ Ein the nonunion sector, but that increase is less than the loss of output A+ B+ C in the union sector. The net loss of output, shown by area B in blue, means that the union wage advantage has caused a misallocation of resources and a decline in economic efficiency. W. W. W, W. E Dy = MRP D, = MRP N2 N, N, N3 Employment Employment (a) Union sector (b) Nonunion sector Wage rate Wage rate
Look at Figure. In the union sector, the union’s ability to raise wages from Wn to Wu decreases total employment from N1 to N2. Thus N1 − N2 workers are displaced from the union sector and will seek employment in the nonunion sector. But suppose that wages in the nonunion sector cannot fall (perhaps because of a minimum wage law). Suppose, more specifically, that they are fixed at Wn in the nonunion sector. If the union and nonunion sectors are the only two sectors in the economy, how many workers will become
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