Question

Though unions can negotiate pay increases for their members, their actions can have unintended consequences for workers. Identify all such possible ones from the list below. It is possible that there is more than one correct answer.

(a) Firms could possibly respond to unions demands for higher wages by hiring fewer workers.
(b) Firms could possibly respond to unions demands for higher wages by substituting capital for labor.
(c) Unions always drive down firms profits.
(d) Higher rates of union membership always diminish aggregate levels of economic output.

Answer 1

(a) Firms could possibly respond to unions demands for higher wages by hiring fewer workers.

(b) Firms could possibly respond to unions demands for higher wages by substituting capital for labor.

Step-by-step explanation:

Unions are formed to work toward better working conditions and welfare of staff.

Workers act collectively to negotiate better terms of employment with the employers.

However when unions try to negotiate for increased pay the employer may take different actions that will bad for the employee.

The employer may decide to actually pay the higher wage but hire fewer workers. This is usually the case when higher wages for many employees will result in loss for the employer.

Secondly the employer may substitute capital for labour. For example investing more in use of machines and reducing labour.

From the employer's viewpoint this will result in lower labour cost due to higher wage payment