3.6.5 - The Influence of Trade Unions in Determining Wages and Levels of Employment

Question 1

What is a trade union?

Answer 1

A group of workers who join together to maintain and improve conditions of employment, including pay.

Question 2

What is collective bargaining?

Answer 2

A process by which wage rates and other conditions of work are negotiated and agreed upon by a union or unions with an employer or employers.

Question 3

What is the main function of a trade union?

Answer 3

Bargain with employers to improve wages and other conditions of work.

Question 4

How are wage rates decided in economies with strong trade unions?

Answer 4

Collective Bargaining.

The market wage rate is determined through the bargaining process, with the number of employers then deciding how many workers to employ at this wage rate.

Question 5

Why have trade unions become less powerful since their peaks in the 1960s and ’70s?

Answer 5

A series of Employment Acts that have restricted legal rights of trade unions.
The impacts of globalisation and international competition upon British Labour markets.

Question 6

Where are trade unions still relatively powerful?

Answer 6

Industries which are protected from international competition.

London Transport
The Rail Industry
Public Employment etc.

Question 7

What has the decline of collective bargaining meant for wage rates?

Answer 7

Wage rates are generally employer decided on a ‘take-it-or-leave-it’ basis.

Question 8

How does the market shift if you introduce a trade union into a perfectly competitive labour market?

Answer 8

The market instantly becomes imperfectly competitive.

Question 9

Draw a perfectly competitive labour market that has a trade union introduced.

Answer 9

Question 10

What happens when a trade union is introduced to a perfectly competitive market?

Answer 10

The wage rate demanded increases.
The level of employment from the employer decreases.
The level of unemployment is L₃ - L₂.

Question 11

Where is the new supply curve here?

Answer 11

W₂XS

Question 12

How elastic is the size of labour force to the left of L₃?

Answer 12

Perfectly Elastic.

Question 13

How many workers is the firm willing to employ?

Answer 13

L₂.

Question 14

Why is there excess supply of labour in this example?

Answer 14

The firm is willing to employ L₂, but L₃ are willing to work.

Question 15

What does this graph show for employment against jobs for unions?

Answer 15

Any attempt by a union to raise wages will lead to unemployment.

If unions are truly in the interest of saving jobs, they will take wage cuts.

Question 16

Why do many Keynesian economists dispute the theory that unions cause unemployment?

Answer 16

It is irrational to assume that conditions of demand for labour reduce due to wage rate increase.
Unions can actually increase the MRP of the labour force by agreeing to accept technical progress, due to the increased productivity, scope increases for wage rates and increased employment.

Wages and employment can rise when a union negotiates for higher wages in firms producing in an expanding goods market. The increased demand for output creates increased demand for labour which is likely to increase aggregate demand for the output of all firms producing consumer goods due to the increase in real wages.

Question 17

Why will higher wages cause firms to adopt improvements to productivity?

Answer 17

To keep costs the same, firms will look to correct inproductive practices.

Some unions may resist these changes to maintain their bargaining power.

If unions push too hard for increased wage rates, firms will look to employ more capital.

Question 18

What are the two ways unions can cause wage rates to increase?

Answer 18

• Refuse entry of non-union workers into the market
• Do not supply union workers below a desired wage

Question 19

How can unions set up a ‘closed shop’?

Answer 19

Refuse entry of non-union workers into the market.

Question 20

How does the union controlled entry of labour supply into the market increase wages?

Answer 20

The supply curve of labour drastically shifts to the left, making the curve far more inelastic. As there is no excess supply of labour, the firms are forced to pay higher wages to a smaller workforce.

(again, the excess supply of labour outside of the unions is massively increased)

Question 21

What is the main assumption made that unions cost jobs?

Answer 21

The market prior to the union was perfectly competitive.

(which is impossible in the real world)

Question 22

Unions cannot raise both wages and unemployment in monopsonist labour markets. T/F?

Answer 22

False, it is possible even without shifting the MRP curve rightward.

Question 23

Where is the labour supply curve in this example, post-unionisation?

Answer 23

W₂XS.

Question 24

Draw the effect of trade unions in a monopsony labour market?

Answer 24

The black lines are the new MC_L and S=AC_L curves.

Question 25

Why do many Keynesian economists dispute the theory that unions cause unemployment?

Answer 25

It is irrational to assume that conditions of demand for labour reduce due to wage rate increase.
Unions can actually increase the MRP of the labour force by agreeing to accept technical progress, due to the increased productivity, scope increases for wage rates and increased employment.