Abstract
What are the effects on inputs, outputs, and their prices of a factor market distortion that is introduced into part of an economy? For example, if a union organizes labor in one sector of the economy what do we expect the effects of such organization to be? The standard textbook analysis is that such a distortion would increase the real price of labor in the organized sector, cause that sector's output price to rise, and thus induce a shift in consumption to the other sector's output. Moreover, the increased cost of labor in the organized sector would cause firms in this sector to substitute other factors for labor. Both this sector's output reduction and its input substitution adjustments would result in a displacement of labor to the unorganized sector, driving down the price of labor there. Thus those workers who remained in the organized sector would benefit from such a factor market distortion while those in the unorganized sector would lose.
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