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My economics textbook says that the more inelastic the demand for a product, the greater the scope for passing cost increases on to consumers and the stronger a trade union's bargaining power will be when negotiating the wage rate of labour.

My interpretation of this is that the central theme is striking - if the workers strike, the supply of the product will decrease and prices will rise due to the shortage. So, does the union have greater bargaining power because there is popular support from the public not to increase price levels, or does this also have something to do with the industry's profit motives?

For example, a shift of the supply curve for the product to the left and will thus decrease profit if we assume that the market is imperfect. But is the ratio of profit decrease greater when demand is inelastic compared to when demand is elastic? Is it logical to assume that a strike will have a large enough effect so as to render a profit decrease, and does that come into consideration when the industry bargains with the union?

FYI (a mathematical approach):

I tried to answer this question by inputting some values and keeping everything constant except for demand elasticity and got an answer that said that the proportion of profit lost will be smaller when the demand is elastic. I didn't look into a proof of this statement for any values, but merely worked it out for a marginal cost of P=Q shifting to P=Q+20 and an initial equilibrium of Q=50/3 in both cases; in case 1 a demand of P=100-5Q with a marginal revenue of P=100-10Q; in case 2 a demand of P=-(1/5)Q+20 with a marginal revenue of P=-(2/5)Q+20. P represents price (the vertical axis) and Q represents quantity (the horizontal axis). The ratio I got of (profit before)/(profit afterwards) with these values was 1.5625 for case 1 (inelastic demand) and infinity for case 2 (elastic demand). (In other words, I happened to shift my supply curve right on to the point where demand = marginal revenue on the vertical axis, so this value is a bit unappealing but nevertheless explanatory) I deduced that the profit loss ratio was greater when demand was elastic. Therefore the industry should feel more motivated to give in to wage strikes when demand is elastic if they are considering a loss in profit. (This contradicts the original statement, but I stress again that this conclusion is based on a single set of values and might not generalize to any situation)

  • What most economy textbooks forget to mention is that all the mathematical theory usually doesn't apply very accurately to real world markets, because there are just too many variables. – Philipp Jun 26 '14 at 14:46
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What most economy textbooks forget to mention is that all the mathematical theory usually doesn't apply very accurately to real world markets, because there are just too many variables.

Labor is not a fungible good

Let's say a company hired the 1000 cheapest laborers on the market. Today, they decide to go on strike. Can the companies CEO just snap their finger and have the next cheapest 1000 laborers continue working as if nothing happened?

No, they can't. Replacing your entire workforce is a very complicated process. First you need to find replacement workers on the market who are cheap, qualified and trustworthy. That means you will have to read a lot of applications and do a lot of interviews. And then you need to train them until they are as productive as those you had before.

Just firing all strikers and hiring new people just isn't feasible.

Strikes cost more to the company than just the number of hours lost

A company often has contracts to fulfill to a specific date. A strike, even when it's short, can lead to them missing these deadlines. This can mean a penalty fee or even losing a customer or supplier altogether.

The company might also miss important business opportunities when they can not act on them because their staff is on strike.

So the cost of a strike is more than just the sum of hours of productivity lost.

Strikes cause publicity damage to the company

Why are strikers waving around signs in front of the company building instead of just going home and spending time with their families? Because they want to cause damage to the image of the company. They want everyone to know how bad they are treated and that anyone who buys their products supports exploitation.

This usually works. When a companies workforce goes on strike, the consumers usually tend to sympathise more with the workers than with the company.

What is the result?

A strike is a lose/lose situation for everyone involved.

  • The company suffers because they can't compete on the market as long as they can not rely on their workforce doing their jobs.
  • The un-unionized workers suffer, because they aren't paid
  • The trade union suffers, because they need to pay the wages for their members
  • The consumers suffer, because the products of the company become unavailable.

However, for all of these people, the consumer is the one who suffers the least. When the strike doesn't end, it destroys the existence of both the workers and the company. The consumers, however, only suffer when the company has a monopoly on their goods. Otherwise they can just buy from another company. It might be more expensive or they might like the products less, but this is usually rather an inconvenience than a threat to their existence.

For these reasons, strikes rarely last more than a few days in the real world.

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I've got an answer:

The consumer's burden is greater than the industry's burden when the supply curve of the product shifts left (due to an increase in the wage rate) when the demand is inelastic. The industry cares less about the cost increase when consumers share a greater proportion of it.

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Inelastic means it is less sensitive to price and people will still buy a product despite much higher prices. If the price goes up to pay for high-dollar union wages, then people are still willing to pay. In a situation where employers cannot find alternatives to union labor (no competition of labor) and where consumers cannot find alternative lower-priced substitute goods (no access to trade with non-union jurisdictions), then higher union wages can be paid for by higher prices to consumers.

It's not about public support. Profit motives are related, but it's motives of both the unions and the industry, as well as the consuming public. Inelastic goods with high prices are still a good deal to the public (they want the product even at higher prices), the union wants higher wages, and the employer doesn't want to scrimp on dividends or reinvestment. So in a political environment that allows union monopoly and limits foreign trade, the union and the employer can gang up on the consumer, who still prefers higher prices to losing the product.

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