A2 Economics 9708: Competitive Wage Determination and Trade Union Effects

In the city of Larkspur, the market for food-delivery riders can be treated as perfectly competitive: many small delivery firms compete to hire riders, and many people are able to work as riders. Over the relevant range, the demand for and supply of delivery riders are given by:

$Q_d = 900 - 30W$ $Q_s = 200 + 20W$

where $Q$ is the number of riders demanded or supplied per week and $W$ is the wage rate in dollars per hour.

(a) Calculate the equilibrium wage rate and the equilibrium number of riders employed in this competitive labour market. [3]

(b) A newly formed riders' union persuades delivery firms to agree to a minimum wage of $18 per hour for all union members, above the equilibrium wage found in (a). Calculate the quantity of labour demanded and the quantity of labour supplied at this wage, and hence the number of riders unable to find work at $18 per hour. [4]

(c) Explain, using your answers to (a) and (b), the effect of the union's action on the wage rate and level of employment of delivery riders in Larkspur. [3]

(d) State one reason why a trade union may be able to negotiate a wage above the competitive equilibrium level for its members. [1]

Part (a): Competitive equilibrium wage and employment

The equilibrium wage rate is found where quantity of labour demanded equals quantity of labour supplied, $Q_d = Q_s$ :

$900-30W = 200+20W$

Collecting the $W$ terms on one side and the constants on the other:

$900-200 = 20W+30W$ $700 = 50W$ $W = 14$

Substituting $W=14$ back into either equation to find equilibrium employment:

$Q_s = 200+20(14) = 200+280 = 480$

(Check using demand: $Q_d = 900-30(14) = 900-420 = 480$ . Consistent.)

So the equilibrium wage rate is $14 per hour and equilibrium employment is 480 riders per week.

Part (b): Effect of the union wage of $18 per hour

At $W=18$ :

$Q_d = 900-30(18) = 900-540 = 360$ $Q_s = 200+20(18) = 200+360 = 560$

Since more riders want to work at $18 per hour (560) than firms are willing to hire (360), there is an excess supply of labour of:

$Q_s-Q_d = 560-360 = 200$

So 200 riders per week are willing and able to work at $18 per hour but cannot find employment.

Part (c): Effect on wage and employment

The union’s action raises the wage riders receive from the competitive equilibrium of $14 per hour to $18 per hour. Because the demand curve for labour slopes downward, delivery firms respond to this higher wage by moving up along their unchanged demand curve and hiring fewer riders. Employment falls from 480 to 360 riders per week. At the same time, the higher wage draws more people who want to work as delivery riders, a movement up along the unchanged supply curve, so quantity supplied rises from 480 to 560. Because 560 riders now want jobs at $18 per hour but firms only demand 360, an excess supply (unemployment) of 200 riders per week results. The union has therefore raised pay for the 360 riders who remain employed, but at the cost of 120 riders who would have had a job at the competitive wage now being without one, plus a further pool of riders newly attracted to the occupation who also cannot find work.

Part (d): A source of trade union bargaining power

Acting together rather than as individuals, riders represented by a union can credibly threaten to withdraw their labour (for example through a strike or a boycott of certain delivery firms) unless firms agree to a higher wage. This collective bargaining power allows the union to negotiate a wage above the level any individual rider could achieve alone, since firms which rely on a large pool of riders cannot easily replace all of them at once.

Final answers

(a) Equilibrium wage $=$ $14 per hour; equilibrium employment $=$ 480 riders per week
(b) At a wage of $18: $Q_d=$ 360, $Q_s=$ 560, so 200 riders cannot find work
(c) Wage rises from $14 to $18, but employment falls from 480 to 360 riders, while 560 riders now want jobs. Creating unemployment of 200 riders
(d) Collective bargaining power / the credible threat of industrial action gives the union negotiating strength individual riders lack