Economics of Trade Unions
... they had the power to control the employer to an extent that there is a fair balance. Of course, if the unions push too hard on an employer, the entrepreneur will have no choice but to withdraw from the industry. This will result in the entire workforce being without employment so there must be a balance. This element of balance is what causes the trade markets to become fair. It is the antagonistic relationship between the two parties that determine the price at which the labour will supply itself. To first explain this let us examine the model of a perfectly competitive labour market. We talked above about remuneration. If we assume this to be adequate opportunity cost for free time, then the aim of the union would be to achieve a higher wage as possible. As the diagram below shows, the union would arbitrate a wage rate at wage level Wu. It has decided that this is the minimum level that its workers will supply themselves for. This is why it is partly horizontal. So the new equilibrium point is where the demand and new supply curves meet. It is important to note that the quantity supplied is now lower. So even though the wage rate is higher, it has a negative effect for those employees who lost their job as a consequence. In the case of monopsonist employers we see that the unions impose the wage rate in the form of the Marginal Factor Cost Curve (MFC). If we make the assumption that the employer wants to maximise profits then he will be seeking to employ at the point where MFC=MRP. So under this condition the further the union stretches the MFC curve the higher the wage and supply rates increase. We can see this new equilibrium point on the diagram below. Ultimately the union could even push supply beyond that achieved under our perfect competition market. Now when we consider a monopsonist employer (a situation far more realistic than the perfect competition model) we see that as well as increasing wage rates, the employee may take on extra workers. So in the case of monopsonistic employment, a union improves circumstances. This is the power of the union. What controls the power a union holds? A union can only possibly be effective if it is operating under conditions that favour the targets it is trying to achieve. The simplest example of this is the one illustrated above, that is that under perfect competition, trade unions can actually worsen the situation whereas with a monopsonist employer the trade unions can improve conditions for its workers. This is because unions have a lot more power to negotiate with profitable firms. If a firm is making abnormal profit it has more residual cash to spend on wages, so unions are more likely to have an effect on monopolies’ and oligopolies rather than perfectly competitive firms that will just make a normal profit. The subscription percentage of a workforce is likely to have an effect on the power of a union. For example, a union only representing 5% of the workforce cannot play the ‘ace card’ of the unions; a strike. The employer will merely acknowledge the strike and employ another few workers as replacements or operate without the 5%; after all it’s more work for the other 95%, so they will earn extra. But a monopolist union, where one union represents the whole workforce can command a lot of power over the company. If a strike is called the company will lose its entire workforce, so it must yield to the demands of the union. This is exemplified if it is a product in high demand. A clear example of this is the recent tube strikes in London. People need to travel around and depend upon the underground. So if the drivers’ strike not only is the un...