Workers, Wages and the Labour Market: Question 3

Worked solution

Part (a): Calculating the excess supply of labour

At the negotiated wage of $17.00 per hour, the number of people willing to work exceeds the number the firm wants to employ:

$1050 - 780 = 270$

So 270 packers are willing to work at $17.00 per hour but are not given jobs. This is the excess supply of labour (unemployment) that results from the union’s negotiated wage.

Part (b): Factors that increase the trade union’s bargaining power

• Union density (proportion of packers who are members): if almost all the packers at the fulfilment centre belong to the union, a strike threat is far more credible, since the firm could not keep the warehouse running with only non-union staff. A low-density union, by contrast, could be more easily worked around.
• How difficult it would be for the firm to replace the packers: if there is a tight local labour market with few alternative workers available, or if replacement staff would need time to learn the firm’s systems, the firm cannot simply hire replacements at short notice. This makes the threat of a strike more costly to the firm, strengthening the union’s bargaining power.

(Another acceptable factor: the firm’s profitability or reliance on fast order fulfilment. A firm that would lose a great deal of revenue from any stoppage, or that can clearly afford to pay more, is more likely to concede to the union’s demands.)

Part (c): Showing the wage floor on the diagram and explaining the unemployment

On a diagram with wage rate on the vertical axis and quantity of labour on the horizontal axis, the demand curve for warehouse packers slopes downward and the supply curve slopes upward, crossing at the market equilibrium wage of $14.00 per hour, where 900 packers are employed.

The trade union’s negotiated wage of $17.00 per hour is drawn as a horizontal line above this equilibrium point, since it is a wage floor set above the free-market wage. Reading across from $17.00 per hour to each curve:

• The supply curve shows that 1050 people are willing to work at this wage (a higher quantity supplied than at equilibrium, since the higher wage attracts more workers).
• The demand curve shows that the firm only wants to employ 780 packers at this wage (a lower quantity demanded than at equilibrium, since packers are now more costly to employ).

Because the wage cannot fall back down to clear this gap (the union has fixed it at $17.00 per hour), the market cannot reach a new equilibrium. The gap between the quantity willing to work and the quantity the firm is willing to employ is unemployment. More people want packing jobs at $17.00 per hour than the firm is willing to provide.

Final answers

• (a) Excess supply of labour $=$ 270 packers.
• (b) Any two of: high union density; the firm’s difficulty in replacing the packers; the firm’s profitability or reliance on fast fulfilment.
• (c) The $17.00 wage floor sits above the $14.00 equilibrium wage, creating a gap between the higher quantity of labour supplied (1050) and the lower quantity demanded (780). This gap is unemployment among warehouse packers.