In the model of reallocation of production under the Auto Pact in Section 3.1, we have assumed that GM takes the wage in each country as given. Suppose that the market wage, w, is unaffected by whatever happens in the auto industry and that workers can easily find a job in the other industries at that wage.
(a) If GM simply pays its workers their opportunity wage of w, then do GM' s workers benefit from, lose from, or remain indifferent to the restructuring of production described in that model (reducing the number of models produced in each country but expanding output at each plant)?
(b) Now, suppose that GM workers are unionized, so that in addition to receiving their opportunity wage they bargain to receive a fraction of the economic rents the company generates. Assume for simplicity that the existence of the union does not affect the firm's output and pricing decisions.8 Call the company's revenues minus the workers' opportunity cost the bargaining surplus, and assume that the workers always receive half of this bargaining surplus (divided up evenly among the workers) in addition to their opportunity wage. Will your answer to the question in (a) be different?
(c) Consider the political incentives of GM workers to support or oppose the Auto Pact and the rationalization of production that it allowed. Will those political incentives be more closely aligned with the political incentives of management if the workers are unionized or if they are not unionized? Explain.