Suppose that there are exactly three factors of production: skilled labor, which is represented by unions; unskilled labor, which is not represented by unions; and capital. Currently, skilled labor earns $15 per hour and unskilled labor earns $5 per hour. Legislation has been proposed to establish a minimum wage of $10 per hour for all workers, and this legislation has been strongly endorsed by the unions.
Assuming that the unions act in the best interest of their members, can you determine whether skilled and unskilled labor are complements or substitutes in production? What about capital and unskilled labor? Can you predict how the owners of capital will feel about the legislation?