Revision on Trade Unions and the Labour Market
Recognise these guys? I will hazard a guess that a normal sixth form economist will struggle to
name more than one of the people pictured! All of them are senior figures in the trade union
movement but such is the scale of the long term decline of unions that few union leaders command
much in the way of public awareness beyond the confines of their own union community. (The
answers are at the bottom of the page!)
Some examples of trade unions
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Association of Flight Attendants (AFA)
Association of Teachers and Lecturers (ATL)
Bakers, Food and Allied Workers Union (BFAWU)
Communication Workers Union (CWU)
Fire Brigades Union (FBU)
National Union of Journalists (NUJ)
National Union of Teachers (NUT)
Prison Officers Association (POA)
Professional Footballers Association (PFA)
Transport and General Workers' Union (T&G)
Basics on trade unions – key roles
1. Trade unions are organisations of workers with a range of economic, social and political aims
2. Unions seek through collective bargaining with employers to
a. Improve the real incomes of their members
b. Lobby for better working conditions and pensions
c. Provide job security
d. Protect their workers against unfair dismissal
e. Provide a counter-balance to the monopsony power of some employers
f.
Support people claiming compensation for injuries sustained in a job
g. Protect workers against possible employment-related discrimination
3. There has been a long term decline in union membership. In 2007, less than 30 per cent of
people in a job in the UK were members of a trade union
a. Only one in six private sector employees in the UK were union members in 2006
b. Almost three in five public sector employees in the UK were union members
c. Around one third of workers say that their pay and conditions are influenced by trade
union collective bargaining
d. The hourly wages of union members averaged £12.43 in 2006, 16.6% more than the
earnings of non-members (£10.66 per hour).
e. Nearly 60 per cent of people working in education are members of a trade union but
only 6 per cent of people in hotels and restaurants and only 11 per cent of people
working in wholesale, retail and motor trades
f.
Only one worker in five in manufacturing industry is a member of a union
g. Only one worker in ten aged between 16-24 years is a trade union member
4. Unions now have significantly less power and influence to determine pay and conditions than
twenty years ago although in some industries (including postal workers, railway worker, fire
fighters and prison officers) unions are still prepared to exert their “industrial muscle”.
5. Under new legislation, employers must recognise a union in pay and employment discussions
when a majority of the workforce want to be represented and has voted for it. But there is
little evidence that union members secure any significant wage “mark-up” or greater job
protection than people in non-union jobs
6. In current times, employers have less incentive to fear unions (many work in partnership
with businesses) but individuals have less incentive to belong since inflation is low and the
economy is strong
7. The number of active trades unions has declined by over 40% between 1990 and 2005 –
there have been a number of mergers.
"Trade unions are in the doldrums. Although the rate of decline in union membership has slowed
since Labour came to power in 1997, the latest figures show that they continued to lose members
in2006. The reasons are clear. Unions are less able to organise new workplaces and new workers
than they used to be. As a consequence, an increasing proportion of all workers have never been
union members, and new workplaces rarely recognise unions for pay bargaining.
Why has union membership declined?
1. Many people no longer believe that union membership is worth their while
a. Low inflation means less pressure for higher pay to protect real incomes
b. Tougher employment laws make it harder for unions to strike
c. Perception that trade unions have lost some of their relevance
2. Changes to the nature of the UK labour market
a. Increased number of people working part-time or flexi time
b. Shift towards shorter employment contracts
c. Decline in the number of jobs in heavy industry (de-industrialisation)
3. Some employers have resisted having trade unions in their workplace – or prefer to deal only
with one or two unions on pay and other issues
Trade union membership has been in decline in countries other than the UK.
Unions – pay and jobs
There are several ways in which unions can seek to influence pay
1. Collective bargaining with employers – they might seek to negotiate pay levels above that
which could exist in free-market competitive conditions – in effect introducing a minimumwage style pay agreement
2. Through limiting the supply of labour available to work in a particular industry – through
some known as a closed shop arrangement – this is far less common these days mainly
because of changes to employment laws
Elastic labour demand – union control of
labour supply forces wages higher – but
employment contracts
Wage
Rate
Inelastic labour demand – unions may be
more effective in negotiating higher pay
levels and increasing total factor earnings
Labour Supply (union
controlled)
Labour Supply (union
controlled)
W3
W2
W1
W1
Labour
Supply to
the
Economy
Labour
Demand
Labour
Demand
E2
E1
Employment
E2 E1
Employment
The ability of unions to bid wages higher without causing job losses depends on several factors:
1. The wage elasticity of demand for labour (stronger union influence when elasticity is low)
2. Whether the union can also achieve higher productivity which makes labour more attractive
to an employer – this might lead to an outward shift in the labour demand curve
3. The credible threat power of unions – e.g. can they strike? And if they do so, how costly will
it be to the employers / businesses affected?
There is one situation where unions might negotiate pay higher and also increase the profit
maximising level of employment – this occurs when a union is bargaining against an employer with
monopsony power and we look at this in the next diagram:
Wage
Rate
(W)
Marginal
Cost with
NMW
Labour
Supply
(ACL)
MRPL
Wtu
Union
negotiated wage
Wq
Demand =
MRPL
Eq
E2
Employment of
Labour (E)
A monopsony producer has buying power in the labour market and may use their buying-power to
drive down wage rates. The monopsonist knows that they face an upward sloping labour supply
curve. Because the average cost of labour is increasing, the marginal cost of extra workers will be
even higher, since we assume that an increase in the wage rate paid to attract one extra worker
must also be paid to existing workers.
The profit maximising level of employment is where the marginal cost of labour equates with the
marginal revenue product of employing extra workers. In the diagram, Eq workers are taken on, but
the monopsonist can employ these workers at an average wage rate of Wq – a pay level below the
marginal revenue product of the last worker. In this sense the monopsonist is exploiting labour by
not paying them the full value of their marginal revenue product
Trade unions might use their industrial muscle to bid the wage rate up to Wtu – this effectively
becomes the marginal cost of employing extra workers – as a result the profit-maximizing level of
employment might expand from Eq to E2 – more people employed at a higher wage than before.
The conventional case against trade unions
1. Unions act as a distortion in the workings of the labour market
2. They drive wages higher and profits & employment lower than if the labour market was fully
competitive
3. They may prevent the introduction of new, flexible work practices
4. They may delay the introduction of new technology which thus affects productivity
5. Their collective bargaining power can lead to higher wages and cost-push inflationary
pressures which leads to a worsening of macroeconomic performance
6. Unions can cause labour market failure such as real-wage unemployment
Counter-arguments
1. The new ‘partnership model’ between employers and unions
a. Unions and their members stand to gain from
i. Higher productivity
ii. The workforce having more flexible skills
iii. Improved working conditions and employment rights
2. Higher pay does not automatically lead to fewer jobs
i. Monopsony argument (see previous page)
ii. Higher pay can create incentives for higher productivity and working more
hours
3. Keynesian effects of increased incomes on consumer demand for goods and services – rising
aggregate demand – leading to a boost to short run economic growth
4. Trade unions have modernised to reflect changes in the domestic and global economy
5. Their role is becoming ever more important
a. Threats to the stability and future of occupational pensions
b. Persistent discrimination in the labour market (gender glass ceilings, age, ethnicity)
6. They can work with management and employers to improve efficiency and competitiveness
– and therefore achieve a positive sum game
7. There has been a step change in industrial relations in the UK – which has made the UK
economy a favoured venue for inflows of foreign direct investment – there are far fewer
industrial stoppages and days lost from strike action (see the chart below)
Trade unions in the news at the
moment:
Labour disputes, Working days lost due to labour disputes
12
12
11
11
10
10
9
9
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
70
National Union of Teachers – striking
about pay deal with the government
millions
days (millions)
Days lost per month
Underground tube drivers - have
announced a three-day tube strike in
April over safety issues
Hollywood script writers – in dispute
until recently about pay and earnings
from the internet / digital TV
UK civil servants threatening to strike
over a disputed pay deal
0
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
Source: Reuters EcoWin
Union leaders: From left to right – Bob Crow (RMT), Derek Simpson (Amicus), Brendan Barber
(Secretary of the TUC) and Gordon Taylor (Chief Executive of the Professional Footballers
Association)