Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

Figure 4.7 
Although a worker's union can achieve various aims, but we 
have yet to analyse whether, these aims are achieved, the union 
members are better off. 
Let us first suppose that there is perfect competition in the 
labour market. Equilibrium will be reached at the point where the 
market demand for labour is equal to the market supply of abour. 
This is point E in Fig. 4.8. The market demand for labour is the 
aggregate VMP
L
curve while the supply curve of labour is positively sloped 
indicating that more of labour is available only at a higher wage. 
The equilibrium wage-rate is OW, and equilibrium level of 
employment is OL. Assuming that firms maximise profits, this is 
the maximum level of employment. Now suppose that the workers 
form a union. Can the union increase the level of employment ? It 
can not because already the maximum possible level of 
employment has been reached. The only course open to the union 
is to seek an increase in the wage rate. The higher wage may be 
aimed at maximising the total wage bill or maximising total gain to 
the union as a whole, or some other aim involving higher wage 
and lower employment. Suppose the union raises wage to OW'. At 
less than this, no labour supply is forthcoming. Therefore now the 
supply curve of labour becomes W'E'MS
L
. The new equilibrium of 
the firm is at in Fig. 4.8 were OW'=VMP
L
. This mean that each firm 
will reduce its demand for labor. The market equilibrium is at E' in 
Fig. 4.8 where the demand curve intersects then supply curve 
W'E'MS
L
. Employment has decreased by LL'.
In other words, a 
total of E'M units of labour are unemployed at the new wage rate 
OW'. 

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Figure 4.8 
Thus, it is clear that an increase in the wage rate leads to a 
decline in the level of employment. Those workers, who as a 
result of rise in wages, get unemployed are worse off unless the 
increase in wages increase the total wage bill and this is 
distributed equally between the employed and unemployed 
workers. Whether a rise in wages will increase the total wage bill 
or not depends on the elasticity of demand for labour. If the 
demand for labour is inelastic, increase in the wage rate will 
increase the total wage bill of the employed workers. If, however, 
the demand for labour is elastic, an increase in the wage rate will 
not only reduce total employment but the total wage bill also. It 
means that the union members as a whole will be worse off 
although those who remain employed will gain due to higher 
wages obtained by the union. This brings out an important lesson: 
When the firms do not enjoy any monopsonitic power, effects of 
worker's union are not necessarily advantageous to its members.