Consider an economy with two labor markets-one for manufacturing workers and one for service workers. Suppose initially that neither is unionized.

a. If manufacturing workers formed a union, what impact would you predict on the wages and employment in manufacturing?

b. How would these changes in the manufacturing labor market affect the supply of labor in the market for service workers? What would happen to the equilibrium wage and employment in this labor market?

a. Wages increase but employment decreases.

b. Wages decreases and employment increases.

Explanation:

An economy has two separate labor markets, one for manufacturing workers and one for service workers. Neither of them is initially unionized.

a. If a union is formed in the market for manufacturing workers, this will increase wages in that market. This happens because the workers will be able to get their wages raised through collective bargaining.

As their wages increase, the supply of manufacturing workers will increase but their demand will decline as hiring workers will become costlier. This will create unemployment in the market for manufacturing workers.

b. The service's labor market is still not unionized. The unemployed workers from the manufacturing labor market will join the services labor market, seeking employment.

As the supply of labor increases in the service labor market, the supply curve will shift to the right. This rightward shift will cause their wages to decline. Employment in the services labor market will increase as it becomes cheaper to hire more workers.