If union contracts raise wages above competitive levels, which of the following is most likely to occur in the labor market?

• A. The labor market will remain in equilibrium with no change in employment.
• B. The demand for labor will increase, leading to higher employment.
• C. Unemployment will increase as the quantity of labor supplied exceeds the quantity demanded.
• D. There will be a shortage of workers willing to work at the higher wage.

Answer: (C)

Verified step by step guidance

1. Understand the concept of a competitive labor market where wages are determined by the intersection of labor supply and labor demand curves.
2. Recognize that if a union contract sets wages above the competitive equilibrium wage, the wage rate is artificially increased.
3. Analyze the effect of a higher wage on labor supply: typically, more workers are willing to work at the higher wage, so the quantity of labor supplied increases.
4. Analyze the effect of a higher wage on labor demand: employers will demand less labor because the cost of hiring workers has increased, so the quantity of labor demanded decreases.
5. Conclude that because the quantity of labor supplied exceeds the quantity of labor demanded at the higher wage, a surplus of labor (unemployment) occurs.