The influence of trade unions on wage determination and employment

Labour markets often feature imperfections due to the involvement of trade unions and government actions, which disrupt the balance seen in perfectly competitive markets. Trade unions play a key role in these imperfect markets by representing workers collectively.

Trade unions

Trade unions are organisations that represent workers in their workplaces, addressing the limited bargaining power of individual employees. Through collective bargaining, they negotiate with employers to achieve several objectives.

Aims of trade unions:

• Raise wages for their members
• Enhance working conditions
• Preserve pay differences between skilled and unskilled workers
• Protect against job losses
• Ensure a safe working environment
• Obtain extra benefits, such as improved holiday entitlements
• Prevent unfair dismissals

Trade unions tend to be most influential in sectors like the public sector, manufacturing, transport, and roles needing specialised skills. Their bargaining strength is greatest when labour possesses unique skills or is scarce.

Effects of trade unions on wages and employment levels

In a competitive labour market, a strong trade union can negotiate wages higher than the equilibrium level. However, raising wages above equilibrium reduces employment. This leads to an excess supply of labour, where more people seek jobs than are available.

In some cases, powerful unions may prompt employers to move operations to areas with lower labour costs, such as shifting manufacturing from high-wage countries to emerging economies with cheaper workforces.

The influence of government through minimum wage

Governments intervene in labour markets by setting minimum wages, which create imperfections by establishing a wage floor. This policy is common in high-income countries and parts of South America, though less so in Africa and Asia.

Purposes and beneficiaries of minimum wage policies

Minimum wage laws aim to alleviate poverty and protect workers from exploitation, especially those with weak bargaining power. They particularly help groups like women in low-skilled roles, including retail, small enterprises, home-based work, and cleaning services.

Arguments for minimum wages

Economic impacts:

• Reduces government spending on benefits for low-income households.
• Boosts tax revenues from higher earnings.

Labour market effects:

• Protects vulnerable workers and promotes fair pay.

Arguments against minimum wages

Economic impacts:

• May lead to unemployment as firms cut jobs.
• Pressures other low-wage workers to demand rises to keep pay gaps.
• Can cause cost-push inflation by increasing production costs.

Labour market effects:

• Does not consider regional differences in living costs, potentially harming areas with lower expenses.

The overall effects depend on the elasticities of labour demand and supply:

• If labour demand is inelastic, job losses are limited.
• If labour demand is elastic, significant job reductions can occur.
• Higher minimum wages generally increase excess labour supply.

As an alternative, some employers adopt a voluntary "living wage" based on actual living costs, which can vary by region.

The influence of monopsony employers

Monopsony represents another imperfection in labour markets, where a single or dominant employer controls hiring and wage setting.

Characteristics and effects of monopsony in labour markets

A monopsony exists when one major buyer of labour dominates, such as a large factory in a small town or a mining company in an isolated area. This employer sets wages by balancing the marginal cost of hiring an additional worker against the marginal revenue product (MRP) that worker generates.

In a monopsony, wages (Wm) are typically lower than the worker's full MRP (Wmrp). This results in lower employment and wages compared to a competitive market.