Chapter 13, Problem 2CYU

To determine

The question requires us to determine the reason for the similar effect of collective bargaining and a minimum wage law on unemployment.

Explanation of Solution

Generally, the government sets minimum wage laws above the equilibrium wage rate. The higher wages in both situations cause the employers to demand fewer workers and at the same time, few workers who have higher skills will be bound to get the wage set by the government. Thus, structural unemployment in the market will increase.

Labor unions generate structural unemployment in the market. In many cases, unions can negotiate greater compensation from employers on behalf of all of a company's employees than the individual negotiation could have done. The goal of this procedure, collective bargaining, is to shift the balance of bargaining power more in favor of employees and away from employers. So, in the end, employers have two options, one is to raise the wage, and the second is to replace the skilled worker with workers who are ready to work at lower pay. So, such unions generate structural unemployment in the market because by threatening businesses with a labor strike, or a collective refusal to work, labor unions are able to bargain more favorable terms. For businesses that struggle to find replacements for striking workers, the prospect of a strike can have highly negative effects.

Both situations cause employers to demand fewer workers and thus, increase unemployment in the market.