Question

Given the decline in union membership over the past 50 years, what does the theory of bilateral monopoly suggest will have happened to the equilibrium level of wages over time? Why?

a. Equilibrium wages increased due to union decline.
b. Equilibrium wages decreased due to union decline.
c. Equilibrium wages remained unchanged.
d. Equilibrium wages became volatile.

Answer 1

The decline in union membership over time implies a decrease in equilibrium wages, as the union's reduced bargaining power leads to the monopsonist's greater influence in wage determination.

Step-by-step explanation:

Given the decline in union membership over the past 50 years, the theory of bilateral monopoly suggests that the equilibrium level of wages would have likely decreased. A bilateral monopoly occurs in a labor market where a union represents labor, creating a monopolistic supplier of labor, and on the demand side, there is a monopsony, with one buyer (employer) dominating the market.

With both sides having power over market conditions, the union would typically push for higher wages, while the monopsony would aim to keep wages low. However, with declining union strength, their bargaining power diminishes, potentially leading to a decrease in wages as the monopsony gains more influence in setting wage levels.