Effects on Employment

If unions do not affect overall real wage levels, t1iu suggests that their impact lies primarily upon relative wages. That is, wages in unionized industries . would rise .relative to those in non unionized industries. MoreoVer, employment would tend 10 be reduced ill unionized and expanded in nonunio~ized industries.

When powerful unions raise real wages to artificially high levels. the result is an excess supply of labor that is called classica/llnemployment This case is also illustrated by Figure 13-7. Assume that unions raise wages above the market-clearing wage at E to a higher. real wage at rt. Then, if the supply of and demand for labor in general ‘are unchanged, the arrow between E and F will represent the number of workers who want to work at wage but cannot find work. This is called classical unemployment because
it results from real wages that are above competitive levels.

Economists often contrast classical unemployment with the unemployment that occurs in business cycles, often called Keynesian unemployment, which results from.insufficient aggregate demand. The effects of too high real wages were seen after the economic unification of Germany in 1990. The economic union fixed East German wages at a level estimated to be at least twice as high as could be justified by labor’s marginal revenue product. The result was a sharp decline in employment in eastern Germany after unification. This analysis suggests that when an economy gets locked into real wages that are too high, high levels of unemployment may result. The unemployment will not respond to the traditional macroeconomic policy of increasing aggregate spending but, rather, will require remedies that lower real wages.

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