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?

Short answer

The theory of bilateral monopoly suggests that the equilibrium level of wages would have likely decreased over time due to the decline in union membership over the past 50 years. The diminishing bargaining power of labor unions makes them less able to negotiate higher wages for their members, which enables employers (monopsonists) to pay lower wages. This shift in balance of power in favor of employers leads to a decrease in overall wages as the effect of the decline in union membership permeates the labor market.

Step-by-step solution

Understanding Bilateral Monopoly

In the labor market, bilateral monopoly refers to a situation where there is a monopoly on the demand side (a single employer) and a monopoly on the supply side (a single labor union). The employer (monopsonist) wants to pay the lowest possible wages while the labor union (monopolist) wants to negotiate the highest possible wages for its members. The interaction between the employer and the union determines the equilibrium wage and employment level.

Analyzing the Decline in Union Membership

Over the past 50 years, there has been a significant decline in union membership. Union members' bargaining power has decreased due to the decrease in membership, leading to weaker unions. This decline in union membership affects the labor market and has implications for the equilibrium level of wages.

Effect on Equilibrium Level of Wages

The theory of bilateral monopoly suggests that, in the face of the decline in union membership, the equilibrium level of wages would have likely decreased over time. Since the bargaining power of labor unions has diminished, they would be less able to negotiate higher wages on behalf of their members. As a result, the employer (monopsonist) can pay lower wages to workers, leading to a decrease in the overall equilibrium level of wages in the labor market.

Explanation for the Change

The change in the equilibrium level of wages can be explained by the diminished bargaining power of labor unions due to a decline in their membership. As union membership declines, the labor supply becomes more competitive, allowing employers to drive wages down. This leads to a shift in the balance of power in favor of employers. Without strong union representation, workers have less negotiating power, and employers can take advantage of the situation to suppress wages. Consequently, the overall wages decrease as the effect of the decline in union membership permeates throughout labor market.