Union wage increase creates labor surplus

Steps:

• Initial equilibrium occurs at wage W1 and quantity L1, where labor demand equals supply.
• Union negotiates wage to W2, above equilibrium, acting as a price floor.
• At W2, firms demand less labor, moving left along demand curve to L2.
• At W2, workers supply more labor, moving right along supply curve to L4.
• Resulting unemployment is excess supply at W2: L4 minus L2, measured as L4 in diagram.

Why D is correct:

• L4 represents the quantity of labor supplied at W2, exceeding demand; surplus (unemployment) equals this excess per standard labor market diagram.

Why the others are wrong:

• A: L1 is initial full-employment level, unaffected by wage change.
• B: L2 is reduced labor demanded at W2, not the unemployed amount.
• C: L3 likely an intermediate point (e.g., partial shift), not the full surplus.

Final answer: D