Assume both labour productivity and the mark-up are constant. Comparing an economy with trade unions to another economy without trade unions, the activities of trade unions are counterproductive because they generate inflationary pressure and in the new equilibrium, employment is lower.

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BlackTom AI · Accepted Answer

The statement asks us to evaluate the claim that, holding both labour productivity and the mark-up constant, an economy with trade unions experiences inflationary pressure and, in the resulting new equilibrium, lower employment compared to an economy without trade unions.
First, consider what a union typically does in this framework: by bargaining for higher wages, unions push up money wages. If productivity and mark-up are fixed, higher wages translate into higher unit costs for firms. When costs rise and output prices (the mark-up over marginal cost) are held constant, firms often pass these costs onto prices, generating inflationary pressure in the economy.
Next, because prices rise while productivity remains unchanged, real wage costs stay elevated and can reduce the quantity of employment demanded by firms, leading to higher unemployment or, at least, lower employment relative to the union-free scenario where wages are not bid up by collective bargaining.
Option 1 (True): This aligns with the described mechanism. The wage increase from unions raises costs, induces inflation, and, at a given productivity and mark-up, tends to lower employment in the new equilibrium as firms cut back on output or hiring to maintain profitability.
Option 2 (False): If one argued that unions have no effect on inflation or employment when productivity and mark-up are constant, that would ignore the direct channel through which higher negotiated wages raise unit costs and price levels. It also conflicts with standard insights from wage-price dynamics where stubbornly higher wages translate into higher inflationary pressure and potential employment effects. Thus this claim would be incorrect given the stated assumptions.
Option 3 (If present): Any assertion that inflationary pressure cannot arise under constant productivity and mark-up, or that employment cannot fall, contradicts the basic cost-pass-through logic. It would be misrepresenting how cost increases propagate into prices and employment.
Option 4 (If present): A statement suggesting inflation would decrease or that employment would rise under unions with fixed productivity and mark-up would likewise be inconsistent with the described mechanism of cost-driven price increases and derived effects on hiring.
In summary, the core idea is that higher wages from unions raise unit costs, trigger inflationary pressure, and, with constant productivity and mark-up, lead to a lower employment level in the new equilibrium compared to without unions.

ECON0017_ECON0016_ECON0018_25-26 Week 3 quiz

Assume both labour productivity and the mark-up are constant. Comparing an economy with trade unions to another economy without trade unions, the activities of trade unions are counterproductive because they generate inflationary pressure and in the new equilibrium, employment is lower.

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