HOW TRADE UNIONS AFFECT WAGES AND EMPLOYMENT IN LABOUR MARKETS: AQA Economics Specification Topic 4.1

Topic 4.1 - Individuals, firms, markets and market failure

Snapshot of the AQA syllabus topic area we’ll be covering in this post.

HOW TRADE UNIONS AFFECT WAGES AND EMPLOYMENT IN LABOUR MARKETS: THE LABOUR MARKET

AQA students must understand the following content [taken from the syllabus]

• The various factors that affect the ability of trade unions to influence wages and levels of employment in different labour markets.

• How wages and employment are likely to be affected by the introduction of a trade union into a previously perfectly competitive labour market and into a monopsony labour market.

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ESSENTIAL INFORMATION

[NOTE: supplementary knowledge, supporting diagrams and questions at the end]

INTRODUCTION

In the previous post, we discussed how monopsony employers can affect the wage and employment outcomes in labour markets. We also briefly touched on the topic of trade unions and how they can be good for restoring the balance of market power in labour markets to workers.

The dynamics of labour markets are significantly influenced by trade union activity. Trade unions fight to increase pay, working conditions, and employment possibilities by speaking on behalf of all workers. The power of trade unions to alter wages and employment in various labour markets is examined on this page. It also looks at how unions affect employment and earnings in both monopsony and previously completely competitive labour markets.

FACTORS INFLUENCING A TRADE UNION’S ROLE IN THE MARKET

Labour Market Structure:

Depending on how the labour market is set up, trade union influence can vary. Trade unions may find it simpler to bargain for improved pay and working conditions when there is intense competition among companies and a broader pool of workers. In contrast, trade unions may have a harder time negotiating for more favourable results in labour markets where there are just a few major firms or where there is significant monopsony power.

Union Density and Strength:

Trade union size and power are significant drivers of their bargaining ability. An increase in the percentage of unionised workers, or increased union density, gives trade unions more clout when negotiating for better pay and working conditions. Trade unions that are strong and well-organised can successfully represent the interests of their members.

Impact on Previously Perfectly Competitive Labour Markets:

Trade unions are likely to have a greater impact on salaries and employment when they are brought into a labour market that was previously a competitive one. Trade unions can bargain on behalf of their members to achieve better benefits and higher salaries. This could, however, result in significant trade-offs including decreased employment levels or higher costs for employers.

Impact on Monopsony Labour Markets:

Trade unions are essential in preventing employers from controlling wages and employment levels in monopsony labour markets, where there is one employer with a high degree of employment power. Trade unions have the power to collectively bargain for more equitable pay and better working conditions. In a monopsony market, the establishment of a trade union might lessen the monopsony employer's capacity to decrease wages and exploit employees.

Conclusion:

In labour markets, trade unions can have a big impact on salaries and employment. These outcomes are subject to their ability to influence the market - such variables include the market structure, union density and the ability of the union to collectively bargain.

Trade unions fight for improved pay, safe working conditions, and job security for workers in both formerly completely competitive and monopsony labour markets. While trade unions can benefit workers' well-being, there may be economic trade-offs as a result of their influence, such as possible reductions in employment levels and higher expenses for companies. This can even lead to companies hiking up their prices to compensate for increased employment costs, which can add to the overal cost of living (inflation).

Overall, trade unions are an essential asset of workers when it comes to restoring power in labour markets and promoting fairer results.

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SUPPLEMENTARY KNOWLEDGE

You should also understand:

• a trade union’s aim is to improve the standard of living of those in the industry

• a trade union’s main target is to protect workers’ wages and ensure they increase over time

• trade unions can also collectively bargain for better working conditions, job security and pensions

• the process of disputing things like wage rates and working conditions is called ‘collective bargaining’

• trade unions mainly exist because labour markets are not perfectly competitive and without them there’d be too much power in the hands of big employers like monopsony firms in the private sector and large state-run companies - for example, the healthcare and education sectors

  • these large employers are notorious for paying employees below their MRP - the marginal revenue product

  • without trade unions, employees often have no choice but to accept exploitative wages

• trade unions can also protect employees in the case of any legal trouble they might have e.g. being fire unfairly or being bullied at work

• trade unions make can ‘productivity bargains’ with employers that agree with employers any pay increases will be performance-related

• in the UK, trade unions were at their most powerful in the 1970s

  • they had around 13 million members at their peak of 1979

  • Margaret Thatcher of the Conservative Party acted to reduce the power of trade unions in the 1980s

  • she made it more difficult for people to go on strike

  • she argued that trade unions made the labour market less flexible and caused supply-side shocks, which are things that harm investment and economic growth prospects

  • she also argued that many trade unions stemmed from the primary and secondary sectors of the economy (responsible for resource extraction like coal, and manufacturing)

  • there was a big decline in the primary and secondary sectors in the 1980s, which also meant the trade unions met the same fate - therefore de-industrialisation was also to blame for the demise of trade union power

• there is a modern trend for employers to offer 0-hour contracts - people under these sorts of contracts are far less likely to join a union - which is also why they’re not as popular now

• trade unions can cause labour market failure in a perfectly competitive labour market

  • trade unions operating in a competitive market could be compared to a monopoly firm in a product market - this is because employees band together and sell their labour in the labour market as one collective entity

• arguments for trade unions include

  • trade unions often make productivity bargains with employers - these promise to increase the MRP of workers which mitigates the risk of unemployment

  • trade unions protect workers and increase the social welfare of households - firms usually have much more money available than individuals - this means that individuals are far more likely to be exploited - for example, if a workers wants to take an employer to court, without a trade union the legal fees would be far too expensive

  • trade unions are a good combatant to monopsony employers which act to decrease wages and pay people below their MRP

    • when a trade union and monopsony power both exist in a market, it’s called a bilateral monopoly

  • trade unions are less likely to cause market failure today because their powers have been decreased by law

    • some of the instruments they used to use have been neutralised by law - take a look at this from BBC News

    • “Slowly but surely the unions' strike weapon was emasculated. Strike ballots were required by law; walkouts were no longer possible on a show of hands in a car park; flying pickets and secondary action had been outlawed; and most importantly of all, a union's assets were at risk if there was "unlawful" action, as the NUM president Arthur Scargill discovered to his cost in the 1984-85 pit dispute.” [BBC News]

    • You can read more here about how Margaret Thatcher changed Britain: http://www.bbc.co.uk/news/uk-politics-22076774

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SUPPORTING DIAGRAMS

diagram to show how trade unions can create unemployment and labour market failure - the trade union intervenes in the market increasing the wage from W to W1 - this cause a kinked supply curve to emerge because the trade union members have to agree to band together and pursue the same wage rates - unemployment levels are increased causing unemployment between Q1 and Q2

diagram showing trade unions in the presence of monopsony employers - monopsony employers would usually pay workers below the MRP - monopsony employers would pay at Wmon at the point MRP = MC - this also means the quantity of labour hired would be Qmon - a trade union in the market can band together its workers and argue for higher wages and more employment - for example the wage rate of Wtrade and employment level of Qtrade - this restores more efficiency to the market as with a competitive market, the allocation of labour resources would be at the point where Supply = Demand, resulting in higher wages and higher employment

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SUPPORTING QUESTIONS

Question 1: How do trade unions influence labour markets?

Answer:

By promoting workers' rights, drafting collective bargaining agreements, and pursuing better pay, benefits, and working conditions for their members, trade unions have can have a strong impact on the labour market. Trade unions have the collective strength to compel businesses to address employees' issues around pay and working conditions and advance the level of equity in the labour market.

However, trade unions can cause labour market failure if they are present in a competitive labour market. This is due to trade unions having too much power relative to small firms demanding labour. Trade unions can collectively bargain and push wages up which would also create some unemployment as employers cannot afford to pay higher wages without hiking up their prices. Therefore, in the case of perfectly competitive labour markets, trade unions can result in worse outcomes.

Question 2: What is the role of trade unions in addressing labour market failure?

Answer:

By addressing the power disparities between employers and employees, trade unions play a significant role in correcting the shortcomings of the labour market. This is the most likely the case when employers have significant monopsony power - the power to set wages in labour markets.

When workers are subjected to unjust treatment, exploitation, or inadequate recompense, they campaign to stop it. Trade unions attempt to increase workers' negotiating power, lessen income inequality, and ensure a better distribution of economic gains within the labour market by organising collective action.

Question 3: How do trade unions affect monopsony labour markets?

Answer:

Trade unions can function as a countervailing factor in monopsony labour markets, where one employer has a sizable amount of market power. Trade unions are able to bargain for better pay, better working conditions, and fairer employment terms by advocating on behalf of all workers. They serve as a check on the employer's market dominance in a monopsony market and safeguard employees from possible abuse or unfair treatment. In monopsony marketplaces, trade unions help to even out the power distribution and promote worker outcomes that are more egalitarian.