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

Given the decline in union membership over the past 50 years, the theory of bilateral monopoly suggests that the equilibrium level of wages will be determined at a point closer to the monopsonist's wage rate and far from the union's wage rate over time.

Step-by-step solution

Step 1. Bilateral monopoly

A bilateral monopoly is a market situation where a union with some power of demanding higher wage rates for employees comes up with a monopsony employer (the sole employer for hiring laborers in the market). That is, the power to control the market wage rate comes from both sides of the labor market, the soul employer and employees.

Step 2. Union membership in the context of bilateral monopoly

The union of laborers is subject to demanding higher wage rates and monopsony in the labor market is subject to lower the market wage rate. The final outcome depends on the relative power of both sides. If the monopsonist's bargaining power is stronger than the union, then the wage rate will be closer to the monopsonist's wage rate, and if the union's bargaining power is stronger than the monopsonist, then the wage rate will be closer to the union's wage rate.

Step 3. The effect of the decline in union membership over the past 50 years on the equilibrium wage rate over time

The relative power of unions has proven statistically to decrease over periods of time. A decrease in the union power means an increase in the bargaining power of the monopsonist. So, the equilibrium market wage rate will be determined closer to the monopsonist's wage rate.

According to the question, the decline in union membership over the past 50 years would result in stronger bargaining power on the part of the monopsonist. So, the equilibrium market wage rate will be closer to Wm (the monopsonist's wage rate) and far from the union's wage rate Wu, as shown in the below diagram, with the equilibrium labor employment of L*.