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Trade unions and the labour market

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Role of trade unions

Trade unions are formed to protect the interests of their members. Unions pursue the following objectives:

  1. To improve the working conditions of members, such as working hours, holiday entitlement, safety at work, working environment.
  2. To improve wages - unions tend to believe strongly in the incentive effect of higher wages.
  3. To improve employment levels - unions will often try to negotiate with large employers to save jobs in the face of cut-backs or general rationalisation.
  4. To reduce discrimination at work - unions have been strongly associated with initiatives to improve opportunities for minority groups and the disabled.
  5. To provide support and advice to its members, such as legal advice, such as when taking an employer to court for ‘unfair’ dismissal, and financial services, such as offering members credit cards and other credit facilities.

Union income

Unions receive income from:

  1. Membership subscriptions
  2. Service income, such as interest on loans to members
  3. Investment income – unions are very large investors in the UK economy and earn income from owning stocks, shares and property assets

The impact of unions

Unions are most powerful in influencing the position of workers when:

  1. The demand for the product is inelastic - this means firms are more likely to meet wage demands.
  2. The product or service is a strategic one – such as power worker’s unions, or the union of transport workers.
  3. Labour represents a small share of total cost – such as airline pilots (in relation to total costs).
  4. The product market is a monopoly - the monopolist can pass on wage increases to consumers!
  5. Labour is concentrated in one geographical area – such as coal miners in South Wales.

Wage bargaining

Unions often represent workers in negotiations with employers. Collective bargaining is common in many industries, including motor vehicles, transport (rail, bus and tube) and public services, such as the police service, the Post Office, and fire and ambulance services.

In most cases of collective pay negotiations occur once a year, with union representatives meeting with employer’s representatives. If an agreement is reached it becomes a ‘pay settlement’, and if not it becomes a ‘pay dispute’.

Pay disputes may go to arbitration through the independent organisation, ACAS (Advisory, Conciliation and Arbitration Service).

Declining power of trade unions

Trade unions today are much less powerful than they were 50 years ago.

There are a number of factors that have contributed to their decline:

  1. Acts of Parliament during the 1980’s - which were designed to reduce their power and influence, such as legislation:
  2. Forcing unions to have secret ballots prior to striking
  3. Banning practices like the ‘closed shop’, ‘secondary picketing’ and ‘wildcat’ strikes
  4. Declining membership

In 1980 there were just over 100 unions, with a combined membership of approximately 12m.

By 2008 there were less that 70 unions and membership had fallen to less than 8m and by 2018 membership had fallen to 6.23 million.

There are several possible consequences of the decline in membership, including:

  1. The perceived lack of influence as a result of legislation controlling union powers.
  2. Increasing female participation in the labour market - statistically, females are less likely to be union members.
  3. Increasing part-time relative to full-time employment.
  4. Privatisation of public utilities - when industries are State owned, there is a greater tendency for the employers to accept the demands of unions (a government can simply raise taxes to pay for higher wages if needed) – privatisation reduced union powers, and hence reduced the desire to be a union member.

The consequences of the decline in power

There are a number of possible consequences of the decline in union power, including:

  1. A more efficient labour market – as a result of the removal of rigidities caused by unionisation of labour.
  2. A more flexible economy, and one that is more competitive in the global economy.
  3. Increased inward investment - strong unions may deter inward investment from abroad.
  4. Multi-nationals often seek to locate in countries with less unionisation (e.g. Japanese firms often avoid locating in countries with strong unions).
  5.  On the ‘cost’ side the decline in union power is likely to reduce ‘equity’ because unions have generally helped the lower paid more than the higher paid, through collective bargaining to increase wages.
  6. Also on the cost side, unions may act as a counter-weight to powerful monopsonies - hence the erosion of power of unions may increase the power of monopsonists to reduce wages and employment.

Bilateral Monopoly

If a union is introduced into a labour market which has a monopsonistic buyer of labour the wage rate is likely to be determined through collective bargaining, with representatives of the monopsonistic firm bargaining with representatives of the monopolistic union. This situation is referred to as a bi-lateral monopoly.

The final outcome of negotiations will depend upon the relative power of both sides, and the specific objectives they have. If the balance of power rests with the union it may wish to raise the wage rate for all its members as well as secure an increase in employment. The goal would be to raise wages and employment to the competitive level.

Given that there is no completive level as the employer is the only buyers, the union will have to make an assessment of what the rates would be in a multi-firm scenario.

Diagrammatically, setting a union minimum for all orkers would make the supply of labour horizontal at the minimum given that all workers would get this wage - in contrast to the unrestricted monopsonist who would pay each worker a ‘marginal’ wage rate. Under the union minimum wage, the marginal and average wage rate would be identical.

The union could even push the wage rate above this, and while not maximising employment, it could still create an employment level above the monopsonistic level.

Quantity ofLabourWages £/week4Copyright: www.economicsonline.co.uk Average cost of labour ACLW (£250)3Marginalcost of labourMCLMRP = DK (£225)L (£200)Wages and employment with a union minimum wageSetting a minimumwage at the competitivewage increases the averagewage and employment Union minimum wage MCL = ACL

For example, at a minimum wage of £225 for all workers, the supply of labour is horizontal at this wage, with the MCL = ACL (S), and the profit maximising monopsonist would employ up to the point where the MCL = MRP, which is at 4 workers - i.e. the market wage rate and the market level of employment.

However, if the minimum wage is set above £225, demand will contract and fewer will be employed. For example, setting the wage at £255 will mean fewer workers employed, as shown. However, raising the rate would still create more employment than the unrestricted monopsonist until the rate exceeded £250. The effect of the minimum wage clearly depends upon its level, and whether it is set above the market rate - the greater it is above the competitive market rate, the lower the level of employment.

Quantity ofLabourWages £/week4Copyright: www.economicsonline.co.uk Average cost of labour ACLW (£250)3Marginalcost of labourMCLMRP = DK (£225)L (£200)Wages and employment with excessive union minimum wageSetting a minimumwage above the competitivewage would decrease employment Union minimum wage MCL = ACLW1

The impact of the union minimum wage also depends on the elasticity of demand and supply of labour. For example, if the demand for labour is relatively inelastic, jobs lost due to the minimum wage will be relatively small. Similarly, if supply is inelastic, the minimum rate may not result in a significant change in employment.

Quantity ofLabourWages £/hourECopyright: www.economicsonline.co.ukSupply (Average cost of labour)WE1E2MarginalCost ofLabourMRP = DMinimum wage

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