Question

Consider the housing construction industry. Assume that the industry is perfectly competitive in both input and output markets. Suppose that, through collective bargaining, a labor union negotiates an industry-wide wage for various kinds of labor (electricians, plumbers, and so on). In particular, it succeeds in negotiating a wage increase for carpenters from $15 to $20 per hour. The following graph shows the labor demand of an individual firm. On the following graph, show what happens at the firm level as a result of the union negotiations.

Answer 1

The labor union negotiations raising carpenters' wages will lead to a decreased quantity of labor demanded at the higher wage rate, and motivate firms to adopt more capital-intensive, labor-productive production methods.

Step-by-step explanation:

The labor union negotiations in the housing construction industry that led to an increase in carpenters' wages from $15 to $20 per hour will impact an individual firm's labor demand. Assuming the industry is perfectly competitive, higher labor costs can lead firms to seek alternative production methods that may involve more physical capital and less labor. This change can increase labor productivity, but also result in job loss for some workers as firms may prefer to operate with fewer, but higher-paid, union workers.

At the firm level, the increased wage rate negotiated by the union implies a movements along the labor demand curve, reflecting a decreased quantity of labor demanded at this higher wage rate if we keep other factors constant. However, due to the substitution effect, some firms may alter their production methods to be less labor-intensive and more capital-intensive. The shift towards more capital-intensive production methods may result from an economic decision to minimize costs in light of the increased wage rates.