Two Sector Model of Labor Employment

When the union uses its monopoly power to increase its members' wages, fewer unionized workers are hired. Because these workers either move to the nonunion sector or choose not to join the union initially, it is important to understand what happens in the nonunionized part of the economy.

Assume that the total supply of unionized and nonunionized workers is fixed. In Figure 14.16 the market supply of labor in both sectors is given by Sl. The demand for labor by firms in the unionized sector is given by Du, and the demand in the nonunionized sector by Dm:. The total market demand is the horizontal sum of the demands in the two sectors and is given by Dl.

Suppose the union chooses to increase the wage of its workers above the competitive wage w*, to \\h,. At that wage rate; the number of workers hired in the unionized sector falls by an amount ALUj as shown on the horizontal axis. As these workers find employment in the nonunionized sector, the wage


FIGURE 14.16 Wage Determination in. Unionized and Nonunionized Sectors. When a monopolistic union raises the wage in the. unionized sector of the economy from w* to wu employment in that sector falls, as shown by the movement along the demand curve Du, For the total supply of labor, given by ,Si., to remain unchanged, the wage in the nonunionized sector must fall from w* to wnu, as shown by the movement along the demand curve Z)nu.

rate in the nonunionized sector adjusts until the labor market is in equilibrium. The new wage rate in the nonunionized sector, wnu, was chosen so that the additional number of workers hired in the nonunionized sector, ALNU, is equal to the number of workers who left the unionized sector.

Figure 14.16 shows an adverse consequence of a union strategy directed toward raising union wages-nonunionized wages fall. Unionization can improve working conditions arid provide useful information to workers and management. But when the demand for labor is not perfectly inelastic, union workers are helped at the expense of nonunion workers.

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