ChainWhat it assumes · how to break it
Start
Stronger trade unions win a pay rise above the market wage, for example in a heavily unionised industry such as rail.
1
As a result, workers bargain as one group, so the employer cannot easily replace individual workers who reject its pay offer.
collective bargaining · bargaining power
collective bargaining · bargaining power
Assumes: Most workers in the sector are members.
But: Where membership is low, or the employer uses many agency and temporary staff, it can keep running during a dispute.
2
This means the union can use the threat of strike action to win a wage above the free-market equilibrium W*.
industrial action · wage above equilibrium
industrial action · wage above equilibrium
Assumes: A strike would cost the employer more than the pay rise.
But: If the employer can keep output going with agency staff, stockpiles or production elsewhere, the strike threat is weak.
3
Consequently, at the higher wage Wu, firms contract along the demand curve for labour (MRP) and employ fewer workers.
demand for labour · MRP
demand for labour · MRP
Best link to attack
Assumes: The labour market is competitive.
Assumes: The labour market is competitive.
But: If the employer is a monopsonist, a union wage between the monopsony wage and the competitive wage raises employment, because the union wage becomes the firm's marginal cost of labour.
4
At the same time, more workers want jobs at Wu, so there is an excess supply of labour and outsiders find it harder to get work in the industry.
excess supply of labour · insider–outsider
excess supply of labour · insider–outsider
Assumes: Outsiders cannot easily find work elsewhere.
But: Workers who lose out can move to non-union sectors, so unemployment rises less, though wages in those sectors are pushed down.
End
Employment in the unionised industry falls in a competitive market, unless the employer has monopsony power.
Evaluation chain
- E1However, whether a union wage costs jobs depends on the labour market being competitive.
- E2If the employer is a monopsonist, such as the main employer in a town, it was already paying below MRP and employing fewer workers than a competitive market would.
- E3As a result, a union wage between the monopsony wage and the competitive wage makes the firm's marginal cost of labour equal to the union wage, so it hires more workers, until the union wage meets the labour supply curve.
- E4So stronger unions can raise both wages and employment where employers have monopsony power, and reduce employment only where they push the wage above the competitive level.
Another way to attack it: If the union also agrees changes to working practices that raise productivity, the MRP curve shifts right, offsetting the fall in employment.
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Questions this answers
- Using a diagram, explain how trade unions may cause unemployment.
- Assess whether stronger trade unions reduce employment.
- Evaluate the effects of a trade union in a monopsony labour market.
Diagram
Competitive labour market: union wage Wu above W*; employment falls from Q* to Qd on the MRP curve and excess supply = Qs − Qd. For the monopsony case, use the MCL, ACL and MRP diagram with the union wage set between the monopsony wage and the competitive wage, where employment rises towards the competitive level.
Reverse and related
Weaker trade unions → wages fall towards W* and employment in the industry rises, in a competitive market.