The Labour Market: Trade Unions

A-level Economics

What is a trade union? Are they good or bad?

What is a trade union?

A trade union is a group of workers who form an organisation to protect the interests of workers. An example would be the NUT (National Union of Teachers) and the Professional Footballers Association (PFA).

What do trade unions aim to achieve?

Their aim is to improve the working lives of people in the industry they represent. They try to improve the standard of living of those in the industry – therefore, the main target of a trade union is to protect the wages that workers receive and to ensure that wages continue to increase. However, they can also aim to achieve other thing like better working conditions, job security and pensions.

Trade unions negotiate with employers via a process called collective bargaining. The workers form a collective group, which gives them even more power when it comes to negotiating things like wages and breaks.

Trade unions exist because markets are not perfectly competitive. There exist many large employers (like the government) who pay workers below their MRP (marginal revenue product). Without a trade union, sometimes workers don’t have many alternatives but to accept low wage levels.

Trade unions increase the power that workers have. They can also represent workers if they get into any legal trouble – so it makes sense to join a union if you have one in your industry.

However, employers don’t give in so easily. They will argue that in order for them to increase pay, members of the workforce need to improve their performance. Therefore, a trade union will also make productivity bargains with the employer, so they can receive performance-related pay.

History of Trade Unions in the UK

Trade unions were at their most powerful in the 1970s. They were powerful because they had so many members, around 13 million members at their peak in 1979.

Margaret Thatcher of the Conservative party acted to reduce the power of trade unions in the 1980s. One of the ways she did this was to make it more difficult to union members to go on strike. The reason for doing this was because strikes can cause the labour force to become less flexible and strikes are often sources of supply-side shocks. These things can harm economic growth and deter future investment from firms.

Furthermore, many of the trade unions formed were in the secondary sector of the economy – the sector responsible for manufacturing. There was a big decline in these manufacturing industries in the 1980s, and when the industries fell into decline, so did the trade unions. So de-industrialisation was responsible for trade unions becoming weaker too.

There is also a tendency these days for workers to be offered flexible and part-time contracts. You may have heard of the 0-hour contract which is cause for debate at present. Workers on these sorts of contracts are less likely to join a union. Just a few decades ago, many people left school at 16, chose a trade and continued down that route on a full-time basis. You can understand why full-time employment contracts were more popular back then. These days, many students are leaving education at age 21, because more and more people are going to university.

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What effects do Trade Unions have in a labour market?

First of all, let’s realise that trade unions cause labour market failure. For labour resources to be allocated efficiently, we need a perfectly competitive labour market, where we have many firms, many workers and perfect information.

With a trade union, the workers have more power than they would have on an individual level – so they are able to increase wages in the market to a level higher than the market equilibrium.

If a trade union is very big and powerful, the union is basically the same thing as a monopoly seller.

In the perfectly competitive market, the wage rate would be at the point W with labour quantity at Q. With the trade union in power, wages are forced up above the market equilibrium level, to a new level (point W1).

What this means is that unemployment is created between Q1 and Q2.

Q2 is the amount of people who are interested in working, however, employers cannot afford to employ that many workers at the high wage rate of W1. They are only willing to employ Q1 workers, possibly because their budgets restrict them from doing so. [remember, a firm is trying to maximise profits – employing more people increases the cost of production for firms and decreases the profits they can make]

Therefore, there is unemployment of Q1-Q2 in this market. That’s why trade unions cause labour market failure – they cause unemployment. There are too many workers looking for jobs, but not enough jobs are available.

The Arguments For Trade Unions

Argument 1

Remember earlier we said that trade unions can negotiate performance-related pay rises? Unemployment does not have to be the outcome when a trade union exists in a labour market. If the trade union agrees with employers that productivity will increase, then wage increases will be more acceptable for firms.

Don’t forget that productivity makes up part of the firm’s demand:

MRP (labour demand) = MPP x MR

If productivity increases, then firms are willing to pay and employ more workers.

Therefore, productivity-based pay increases will not be a cause of unemployment.

Argument 2

The other argument for trade unions is that they do protect workers and they can increase social welfare. Usually firms have far bigger pockets than individuals. That means workers are far more likely to be exploited. If a worker gets into legal trouble at work, the firm may not protect the worker and instead protect itself.

For example, a cashier in a supermarket accidentally forgets to ID a customer buying alcohol. This accident may result in the cashier being fired. A union would protect the rights of the worker and pay for his/her legal fees.

Therefore, trade unions particularly benefit workers who cannot afford to pay legal fees – those on the lower incomes will be positively affected.

Argument 3

Also, don’t forget that in today’s world there are many large monopsony employers in labour markets [the government is one of them]. Trade unions exist to level the playing field. Without trade unions, monopsony employers have greater power, which causes labour market failure itself.

When a trade union and monopsony employer exist in a market, it is called a bilateral monopoly. This is because there is a single seller and a single buyer in the market.

In a monopsony labour market, trade unions can increase wages and jobs available.

Argument 4

Trade unions are less likely to cause market failure today. As mentioned earlier, government legislation has decreased the power trade unions have. Before, trade unions used to have power that could disrupt the economy.

“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

So in summary, we have learned:

1. What trade unions are

2. Trade union history in the UK

3. How they can cause labour market failure via unemployment

4. Why trade unions are good