Key Terms
Trade union: An organisation of worker who join together to further their own interests.
Collective bargaining: Negotiation of wages and other conditions of employment by an organised body of employees.
Collective bargaining: Negotiation of wages and other conditions of employment by an organised body of employees.
Theory
What is a Trade Union?
A trade union is an organised association of workers in a trade, group of trades or profession, formed to protect and further their rights and interests.
Examples Of Trade Unions
Effect of a Trade union on wages and employment
Labour supply curve is perfectly elastic at the wage demanded by the union (W2).
Beyond the kink, higher wages are necessary to elicit further extension of supply.
As a result, the wage is higher than it would have been in competitive labour market (W1).
And the higher wage causes a contraction of labour demand and an extension of labour supply. This causes excess supply of labour. (Unemployment E2-E3).
The extent of unemployment depends on elasticity of labour demand.
Advantages of Trade Unions
1) Increase in wage for it’s members
As we know, trade unions can successfully bargin for higher wages. This will also lead to an increase in consumer spending as household have more dispensible income. Also if the members of the trade union belong to low income groups then wage increases will also reduce relative poverty.
2) Counter-balance monopsony power
If the employer has monopsony power, then more people will be unemployed if left to market forces. Trade unions force the monopsonist to employ more workers to a suitable number.
3) Help uphold health and safety legislation / improve moral
Trade unions uphold the health and safety standards of the workplace. This is also beneficial for firms as better moral and working conditions means worker are less likely to switch jobs.
This reduces recruitment and training costs
Also reduces frictional unemployment
4) Protect employment in recession
Service sector jobs tend to more likely to be part time and temporary. Unions are therefore needed to protect workers in these kinds of jobs.
As we know, trade unions can successfully bargin for higher wages. This will also lead to an increase in consumer spending as household have more dispensible income. Also if the members of the trade union belong to low income groups then wage increases will also reduce relative poverty.
2) Counter-balance monopsony power
If the employer has monopsony power, then more people will be unemployed if left to market forces. Trade unions force the monopsonist to employ more workers to a suitable number.
3) Help uphold health and safety legislation / improve moral
Trade unions uphold the health and safety standards of the workplace. This is also beneficial for firms as better moral and working conditions means worker are less likely to switch jobs.
4) Protect employment in recession
Service sector jobs tend to more likely to be part time and temporary. Unions are therefore needed to protect workers in these kinds of jobs.
Disadvantages of Trade Unions
1) Wage Inflation
If unions become too powerful they can bargain for higher wages, above the rate of inflation. If this occurs it may contribute to general inflation. Powerful trades unions were a significant cause of the UK's inflation rate of 27% in 1979.
2) Prevents Growth
If firms wish to grow they must take on more employees. However to attract more employees they must offer higher wages to all existsing workers making growth unfeesable. Moreover unions sometimes strike and work unproductively (work to rule) leading to lost sales and output.
However trades unions can help to negotiate productivity deals. This means they help the firm to increase output in turn this enables the firm to be able to afford higher wages.
Also increases in productivity are often because of investment in capital rather than labour, so firms may not need to take on more labour.
3) Ignore non-members
A trades union only considers the needs of its members; they often ignore the plight of those excluded from the labour markets e.g. the unemployed.
4) Prevents innovation
When a trade union exists in either a competitive or an imperfect labour market, profits are reduced for the firm due to higher wages.
This may offset dynamic efficiency. In theory dynamic efficiency, which leads lower average costs, could be passed on to workers in the form of higher wages.
5) Offsets entrepreneurship
If trade union power is strong enough, this may offset entrepreuners taking the risks to set up firms. This is because the incentives are reduced by lower financial return and heavy beaurocracy.
6) Reduced International Competitiveness
Trade unions increase labour costs, which are a main factor of comparative advantage. Trade unions therefore reduce comparative advantage and in turn international competitiveness.
If unions become too powerful they can bargain for higher wages, above the rate of inflation. If this occurs it may contribute to general inflation. Powerful trades unions were a significant cause of the UK's inflation rate of 27% in 1979.
2) Prevents Growth
If firms wish to grow they must take on more employees. However to attract more employees they must offer higher wages to all existsing workers making growth unfeesable. Moreover unions sometimes strike and work unproductively (work to rule) leading to lost sales and output.
However trades unions can help to negotiate productivity deals. This means they help the firm to increase output in turn this enables the firm to be able to afford higher wages.
Also increases in productivity are often because of investment in capital rather than labour, so firms may not need to take on more labour.
3) Ignore non-members
A trades union only considers the needs of its members; they often ignore the plight of those excluded from the labour markets e.g. the unemployed.
4) Prevents innovation
When a trade union exists in either a competitive or an imperfect labour market, profits are reduced for the firm due to higher wages.
This may offset dynamic efficiency. In theory dynamic efficiency, which leads lower average costs, could be passed on to workers in the form of higher wages.
5) Offsets entrepreneurship
If trade union power is strong enough, this may offset entrepreuners taking the risks to set up firms. This is because the incentives are reduced by lower financial return and heavy beaurocracy.
6) Reduced International Competitiveness
Trade unions increase labour costs, which are a main factor of comparative advantage. Trade unions therefore reduce comparative advantage and in turn international competitiveness.