The influence of trade unions in determining wages and levels of employment

Influence in perfectly competitve markets

Unions push wages above equilibrium. This causes a retraction in demand for labour so more unemployment. Creating excess supply known as real wage unemployment.

Influence in monopsong markets

When a union faces a monopsonist, it can lead to higher wages and higher employment. By setting a minimum wage, the union makes the firms MCL horizontal at wage level. Removing the firms incentice to restrict hiring to keep wages low.

Bilateral monopoly

When a signle powerful union faces a single powerful employer. The wage is unpredictable and depends on relative bargaining power.

Factors affecting union bargaining power

• Union density: Proportion of workforce belonging to the union.

• Profitability of the firm: Union have more leverage if the firm is more profitable.

• Elasticity of demand for labour: If labour is hard to replace with capital, union has more power.

• Legislation: Gov laws since 1980s has reduced union power.

Pros of Trade Unions

• Can prevent exploitation of labour in monopsonies

• Can negotiate productivity deals

• Higher pay can boost morale and productivity

Cons of Trade Unions

• May cause unemployment

• Higher wages lead to cost push inflation

• Strikes lead to lost output and disruption