ChainWhat it assumes · how to break it
Start
Trade unions become stronger, for example by recruiting more members in rail or the NHS, and push for higher pay through collective bargaining.
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
Best link to attack
Assumes: A strike would cost the employer more than the pay rise.
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, workers covered by the agreement earn a wage premium over similar workers who are not covered.
union wage premium
union wage premium
Assumes: The higher wage applies mainly to union members.
But: Collective agreements usually cover non-members in the same workplace, and non-union firms may match union pay to keep staff, so measured premiums are small.
End
Wages rise above the market-clearing level for workers covered by the union's agreement.
Evaluation chain
- E1However, the union's power to raise wages depends on how costly a strike is for the employer.
- E2When workers are hard to replace and the service cannot be stored, as with train drivers or doctors, a strike quickly stops output and revenue.
- E3As a result, the employer has a strong incentive to settle, and the union can win a large rise.
- E4So unions raise wages most where their members are essential and hard to replace, and much less where employers can switch to agency staff, capital or production overseas.
Another way to attack it: In a monopsony labour market the union acts as a countervailing power: pushing the wage up from the monopsony level towards the competitive wage can raise pay without cutting jobs.
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Questions this answers
- Explain how trade unions can raise wages above the equilibrium level.
- Assess the impact of trade unions on wages in a labour market.
- Discuss whether stronger trade unions benefit workers.
Diagram
Competitive labour market: the union sets a wage Wu above equilibrium W*, drawn as a horizontal line that acts as the labour supply curve up to the original supply curve. Covered workers are paid Wu.
Reverse and related
Weaker trade unions → less bargaining power, so wages move back towards the market level, or below it where employers have monopsony power.