Chapter 13 – Wage Determination (+ Appendix)
13A-1
Chapter 13 Wage Determination (+ Appendix)
APPENDIX QUESTIONS
1. Which industries and occupations have the highest rates of unionization? Which the lowest?
Speculate on the reasons for such large differences. LO7
Answer: Figure 1a shows that government and transportation are the two highest by
2. What percentage of wage and salary workers are union members? Is this percentage higher, or
is it lower, than in previous decades? Which of the factors explaining the trend do you think is
most dominant? LO7
Answer: 15.3 million workers or 12.3 percent. This is lower than in past decades.
3. Suppose that you are president of a newly established local union about to bargain with an
employer for the first time. List the basic areas you want covered in the work agreement. Why
might you begin with a larger wage demand than you actually are willing to accept? What is the
logic of a union threatening an employer with a strike during the collective bargaining process?
Of an employer threatening the union with a lockout? What is the role of the deadline in
encouraging agreement in collective bargaining? LO7
Answer: Areas to be included in a work agreement:
1. Wage rates with automatic increases over time, preferably in the form of a
cost-of-living adjustment
4. Explain how featherbedding and other restrictive work practices can reduce labor productivity.
Why might strikes reduce the economy’s output less than the loss of production by the struck
firms? LO7
Chapter 13 – Wage Determination (+ Appendix)
13A-2
Answer: This type of activity may block the introduction of output increasing machinery
5. What is the estimated size of the union wage advantage? How might this advantage diminish
the efficiency with which labor resources are allocated in the economy? Normally, labor
resources of equal potential productivity flow from low-wage employment to high-wage
employment. Why does that not happen to close the union wage advantage? LO7
Answer: Fifteen percent. The higher wages that unions achieve reduce employment,
displace workers, and increase the marginal revenue product in the union sector. Labor
6. Contrast the voice mechanism and the exit mechanism for communicating dissatisfaction. In
what two ways do labor unions reduce labor turnover? How might such reductions increase
productivity? LO7
Answer: The voice mechanism lets the employer know dissatisfaction is present through
APPENDIX PROBLEMS
1. Suppose that a delivery company currently uses one employee per vehicle to deliver packages.
Each driver delivers 50 packages per day, and the firm charges $20 per package for delivery.
LO7
a. What is the MRP per driver per day?
b. Now suppose that a union forces the company to place a supervisor in each vehicle at a cost of
$300 per supervisor per day. The presence of the supervisor causes the number of packages
delivered per vehicle per day to rise to 60 packages per day. What is the MRP per supervisor per
day? By how much per vehicle per day do firm profits fall after supervisors are introduced?
c. How many packages per day would each vehicle have to deliver in order to maintain the firm’s
profit per vehicle after supervisors are introduced?
d. Suppose that the number of packages delivered per day cannot be increased (only 50 are
delivered) but that the price per delivery might potentially be raised. What price would the firm
have to charge for each delivery in order to maintain the firm’s profit per vehicle after supervisors
are introduced?
Chapter 13 – Wage Determination (+ Appendix)
13A-3
Feedback: Consider the following example. Suppose that a delivery company currently
uses one employee per vehicle to deliver packages. Each driver delivers 50 packages per
day, and the firm charges $20 per package for delivery.
Part a:
a. What is the MRP per driver per day?
To find the marginal revenue product (MRP) for each driver multiply the number of
Part b:
b. Now suppose that a union forces the company to place a supervisor in each vehicle at a
cost of $300 per supervisor per day. The presence of the supervisor causes the number of
Part c:
c. How many packages per day would each vehicle have to deliver in order to maintain
the firm’s profit per vehicle after supervisors are introduced?
By adding the supervisor to the vehicle, the company will need to generate $300 in
Part d:
d. Suppose that the number of packages delivered per day cannot be increased (only 50
are delivered) but that the price per delivery might potentially be raised. What price
would the firm have to charge for each delivery in order to maintain the firm’s profit per
vehicle after supervisors are introduced?
Again, by adding the supervisor to the vehicle, the company will need to generate $300 in
Chapter 13 – Wage Determination (+ Appendix)
13A-4
2. Suppose that a car factory initially hires 1500 workers at $30 per hour and that each worker
works 40 hours per week. Then the factory unionizes, and the new union demands that wages be
raised by 10 percent. The firm accedes to that request in collective bargaining negotiations but
then decides to cut the factory’s labor force by 20 percent due to the higher labor costs. LO7
a. What is the new union wage? How many workers does the factory employ after the agreement
goes into affect?
b. How much in total did the factory’s workers receive in wage payments each week before the
agreement? How much do the factory’s remaining workers receive in wage payments each week
after the agreement?
c. Suppose that the workers who lose their jobs as a result of the agreement end up unemployed.
By how much do the total wages received each week by the initial 1500 workers (both those who
continue to be employed at the factory and those who lose their jobs) change from before the
agreement to after the agreement?
d. If the workers who lose their jobs as a result of the agreement end up making $15 per hour at
jobs where they work 40 hours per week, by how much do the total wages received each week by
the initial 1500 workers change from before the agreement to after the agreement?
Feedback: Consider the following example. Suppose that a car factory initially hires
1500 workers at $30 per hour and that each worker works 40 hours per week. Then the
factory unionizes, and the new union demands that wages be raised by 10 percent. The
firm accedes to that request in collective bargaining negotiations but then decides to cut
the factory’s labor force by 20 percent due to the higher labor costs.
Part a:
a. What is the new union wage? How many workers does the factory employ after the
agreement goes into affect?
The original wage rate was $30.00 per hour. The new union wage is 10% higher, or
Part b:
b. How much in total did the factory’s workers receive in wage payments each week
before the agreement? How much do the factory’s remaining workers receive in wage
payments each week after the agreement?
Total earnings = hourly wage x hours worked x number of workers.
Chapter 13 – Wage Determination (+ Appendix)
13A-5
Part c:
c. Suppose that the workers who lose their jobs as a result of the agreement end up
unemployed. By how much do the total wages received each week by the initial 1500
workers (both those who continue to be employed at the factory and those who lose their
jobs) change from before the agreement to after the agreement?
Since the workers no longer employed with the car factory after unionization remain
Part d:
d. If the workers who lose their jobs as a result of the agreement end up making $15 per
hour at jobs where they work 40 hours per week, by how much do the total wages
received each week by the initial 1500 workers change from before the agreement to after
the agreement?
The 1200 workers who continue to work for the company earn $1,584,000 (= $33 x 40 x
1200).