14.05 Intermediate Applied Macroeconomics Exam #3

W/PL DL SW / PW’/PFigure 8 F -1 (Y MAX ’) F -1 (Y MAX )L(d) The New Deal in 1933 allowed formation of labor unions. Which model accountsfor the fact that these unions negotiated more in the interests of the current workersand their members rather than in the interests of the entire labor force? Use thismodel to explain the more persistent unemployment experienced in the later 1930s.In the latter half of the 1930s, following the passing of laws that gave workers the right toorganize (including the Wagner Act), unions gained some strength in the US. Wagescould still adjust, but they were not totally flexible as in the model in part (b). Now wecan use the insider-outsider model to think about how unemployment might havecontinued in the late 1930s. In this situation, only those who are employed in this periodhave a say in what the wage will be in the next period, so the unemployed workers arenot able to bid the wage down (so as to increase the number of people employed in thenext period). This gives us the persistent unemployment that we saw in the late 1930s.Figure 9 presents this case.7