Answer to Question 2:

Unionization of labour causes unemployment

1. only if the government also imposes a minimum wage.

2. if the entire economy is unionized and the unions are successful in raising wages above the level that would rule in the private market.

3. even if only part of the economy is unionized.

4. all of the above are true.

Choose the correct option.


Option 2 is the correct one. The entire economy must be unionized or under union control for unionization of labour to cause unemployment. Also, of course, the pressure of the unions must result in wage rates that are above what would occur under free markets. If only part of the economy is under union control, increased wages in this unionized sector will force workers in that sector into unemployment. But they will then go to the non-unionized sector and bid wages down there until everyone who wants a job at prevailing wage rates has one. Unions will thus have no effect on aggregate unemployment unless they control the entire economy. Government minimum wages will cause unemployment, but such policies are quite separate from any activities of unions.

One sometimes hears arguments to the effect that high union wages cause non-union workers to also demand high wages. This would imply that people will refuse to work at wages below what they observe others to be earning. It is difficult to imagine that anyone would choose to earn nothing at all rather than work at a wage below what others are earning or what they think they deserve. In any case, such unemployment is voluntary. One cannot argue that such workers choose to work at market wages but cannot find employment. It should kept in mind here that many people work in modern industrialized economies at wages that are substantially below the wage rates in unionized industries.

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