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Essay on Trade Unions and Wages
Essay # 1. Introduction to Trade Unions and Wages:
The elimination of monopsonistic exploitation of labour can be achieved by trade unions even in the absence of minimum wage laws.
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The wage that the trade union wants to negotiate will depend on its objectives:
1. If the trade union wants maximum wages, with the current level of employment unchanged, it will negotiate the wage rate at wm in Fig. 26.7.
2. If the trade union wants maximum employment, it will negotiate the wage rate at w0.
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3. Intermediate levels between w0 and wm correspond to various combinations of objectives of raising wages and employment. Although negotiating wages in the range w, to w0 raises employment and wage, the same increases in employment can be achieved at higher wage in the range of w0 to wm. Thus the union is better off on the segment EF than GF in Fig. 26.7.
Essay # 2. Limits to the Bargaining Power of Trade Unions:
The capacity of trade unions to raise wages in a particular industry depends on the elasticity of demand for labour. The more elastic is the demand for labour, the more difficult it is for trade unions to raise wages. In this context we have to refer to all the determinants of the elasticity of the derived demand for labour.
Here we may note that at that the ultimate analysis it seems that the capacity of a trade union to raise wages in a particular industry depends on the effect of trade union activity on the level of profit of a firm or the industry under consideration.
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If, as a result of trade union activity, the level of profit of an industry falls all the firms will resist trade union activity. If, however, the level of profit in the unionized industry rises there will be no great resistance to trade union activity.
Essay # 3. Exploitation of Labour under Monopoly and Monopsony:
Minimum wage law or a trade union bargaining can eliminate the ‘exploitation’ of labour by a monoposonist and bring the wage rate into equality with the VMP. If there is monopoly in the product market MRP < VMP. Thus there is an additional exploitation of labour which cannot be eliminated by minimum wage laws.
In Fig. 26.8 we show employment under monopoly in the commodity market and monopsony in the labour market. The intersection of the MRP curve with the MFC curve fixes the level of employment at L, and from the supply curve we get the wage rate (w1). The MRP for this level of employment is w2, and the corresponding VMP is w3. So the exploitation of labour can be decomposed into two parts.
w2 – w1 = monopsonistic exploitation
w3 – w2 = monopolistic exploitation
w3 – w1 = total exploitation
Minimum wage laws or trade union bargaining can eliminate w2– w1. But minimum wage laws cannot eliminate w3– w2. If the minimum wage is raised to any point between w2 and the level of employment will fall. The reason is that the monopolist would equate MRP to the wage rate in order to determine how many workers to employ.
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How much of w2– w1 can be eliminated depends on the relative bargaining power of the two parties — the employer (who is a monopolist in the commodity market and monoposonist in the labour market at the same time) and the trade union. This is a case of bilateral monopoly, and there is no determinate solution to this problem.
This is known as indeterminacy of wage under collective bargaining. With minimum wage laws and any labour union, the monopolist would equate MRP with MFC in Fig. 26.8. He would hire L number of workers and pay them a wage of w1.
If a minimum wage is set at w2, employment remains unchanged at L. If the trade union is strong, it can force the monopolist to forego some profits and move the equilibrium to the point F where both employment and the wage rate rise as compared to the point E.
At point F there is no monopolistic exploitation and VMP = MFC. The ideal competitive solution is, of course, given by the point G. But it is possible to reach the point only if the trade union negotiates increases n employment and permits the wage rate to be determined by the supply curve Ls. Thus what happens to wages and employment depends on the respective powers of the monopolist and trade union and whether the trade union negotiates increases in employment only or both increases in employment and increase in wages.
Essay # 4. Economic Effects of Trade Unions:
Trade unions can raise wages no doubt, but not to an unlimited extent. The capacity of trade unions to raise wages depends on a number of factors. These are mainly the determinants of elasticity of demand for labour.
However, trade unions can raise wages in four ways:
(i) By restricting the supply of labour,
(ii) By setting a standard (minimum) wage above the equilibrium (competitive) level,
(iii) By shifting rightward the derived demand curve for labour and
(iv) By exercising their collective bargaining power.
We have noted that in a monopsony situation trade unions can raise both wages and employment. Whether there will be excess supply of labour or not as a result of trade union activity depends on whether the standard wage is fixed below the competitive level or above it. If it is fixed above the competitive level some unemployment is inevitable as a result of trade union activity.
We have also noted that there is no determinate solution to the problem of wage fixation in a situation of bilateral monopoly. The reason is that the wage rate is determined not by the market forces of demand and supply but by a collective bargaining process. For the sake of completeness we may now compare all the methods of raising wages and examine their effects on employment, even at the cost of little repetition.
In reality the wage rate in a particular industry is determined by collective bargaining. It is the process by which union leaders and management negotiate a mutually agreeable contract specifying wages, employee benefits and working conditions. Here we focus on a single objective of unions: higher wages.
These methods may now be discussed one by one:
(a) Setting a standard wage:
In part (b) of Fig. 26.9 the equilibrium wage rate is w0. At this wage an individual firm of part (a) hires labour up to l0 where MRPL equals w0. Each firm hires the same quantity l0 and total employment is L0.
If a union now negotiates a wage w1 above the equilibrium level, the supply curve facing the firm shifts upward to ls1. The firm hires fewer workers, l1 and total employment falls to L1. At wage w1 there is excess supply of labour equal to L2 – L1.
(b) or (c) Restricting the supply of labour or increasing the demand for labour:
If a union is able to restrict the supply of labour to an industry, the labour supply curve shifts upward from L to L as in part (a) of Fig. 26.10. As a result the wage rate rises from w0 to w1 but employment falls from L0 to L1. The union can restrict its membership with high admission fees, long training (apprenticeship) periods, difficult qualifying exams, restrictive and licensing requirements to slow down or discourage new workers from joining the union.
An alternative method of increasing wages is to increase the demand for union labour by shifting rightward the demand curve for labour as shown in part (b) of Fig. 26.10. In this case as the demand curve shifts from L to L, both the wage rate and the level of employment rise at the same time. This method is an attractive alternative because there is no need to allocate (ration) a limited number of jobs among a large number of job seekers or to restrict union membership.
Some ways of increasing the demand for union labour are the following:
(i) Increase demand for union-made goods:
The demand for union labour may be increased through a direct appeal to consumers to buy only goods made by unionized labour. Since the demand for labour is a derived demand, an increase in the demand for union-made products will automatically increase the demand for union labour.
(ii) Restrict supply of non-union-made goods:
Another way to increase the demand for union labour is to restrict the supply of products that compete with union-made products. Again this method relies on the derived nature of labour demand.
(iii) Increase productivity of union labour:
The efficiency with which unions organise and monitor the labour-management relationship increases the demand for union labour. Unions increase worker productivity by minimising conflicts, resolving differences and imposing greater discipline on workers or by motivating the workers. If unions are able to increase productivity of workers the demand for union labour will increase.
(iv) Featherbedding:
Still another way of increasing the demand for union labour is by featherbedding, which is an attempt to ensure that more union labour is hired than employers would normally do. Featherbedding is a normal response to the introduction of labour-saving technology. It does not create a true increase in demand, in the sense of shifting the demand curve of labour to the right.
Instead it forces firms to hire more labour than they really need. The union tries to limit a firm to an all-or-nothing choice either hire a certain number of workers or its members will strike, in which case the employer cannot hire any worker. Thus the union attempts to dictate not only the wage but also the quantity that must be hired at that wage, thereby moving the employers to the right of their derived demand curve for labour.
(d) Exercising collective bargaining power — the bilateral monopoly case:
In practice wages are determined by a collective bargaining process. Of special significance in this bargaining process is the fact that the union, by pushing up wages, can initially increase both wages and employment. We have already noted that a monopsonist hires more workers than a competitive firm. The same effect is felt if a minimum wage is fixed by the government in case of a monopsonist employer.
Essay # 5. Alternative Trade Union Goals:
We normally assumed that trade unions attempt to maximise wages. But at times unions try to achieve other objectives. One such objective is maximisation of employment. The other is maximisation of the total wage bill. Still another is maximisation of economic rent. Thus trade unions have to adopt a variety of policies to achieve their diverse goals.
(a) Maximising employment:
In Fig. 26.11 w0 is the equilibrium wage and L0 is the level of employment. At any other wage employment is either the quantity demanded of labour or the quantity supplied, whichever is less. If the wage rate is w1 employment is L1 (corresponding to point F). If the wage rate is w2 employment is again L1 (corresponding to point H). Thus we see that any wage higher than lowers employment since the quantity demanded is reduced. Likewise any wage below w0 lowers employment, since the quantity supplied is reduced.
The relevant portions of the supply and demand curves are drawn as solid lines (in contrast to the broken lines for the rest of the curves) to underscore the dominance of what is called ‘short side’ of the market. At a wage above w0, the demand curve determines employment and at a wage below w0, the supply curve determines employment. So the competitive wage rate maximises employment, but the workers do not need a union to achieve this objective. Thus unions are redundant if the competitive outcome is sought to be achieved.
(b) Maximising the wage bill:
Another possible objective of the trade union is to maximise the total wage bill, which is employment multiplied by the wage rate. This may be due to the fact that unions seek to maximise their dues, which are a certain percentage of pay. Here we assume that the union is a monopoly seller of labour to competitive firms which are wage-takers (not wage-setters).
In order to induce firms to hire additional labour, the union has to lower market wage (just as a monopolist, being a price-maker, has to reduce the price of his product, to be able to sell extra units). But as the union lowers the wage bill, the wage earned by those workers who were already employed in the industry must also fall. This means that the union’s marginal revenue (MR) will always be less than the wage.
The union’s MR in Fig. 26.12 shows how much the total wage bill changes as the wage falls to increase employment. As long as its MR is positive, lower wages will increase the total wage bill. We know that as long as the elasticity of demand for a product is greater than one, MR is positive.
The same relation is valid for labour. Therefore, when the demand for labour is elastic, a lower wage will increase the total wage bill. When the demand for labour is inelastic, MR is negative. So a lower wage will reduce the total wage bill. In Fig. 26.12 the total wage bill is maximised when the MR of the union is zero. This means that a wage floor w* will maximise the total wage bill. Thus the total wage bill is maximised where the elasticity of demand for labour is equal to one, which is at point F on the labour demand curve.
This may be proved as follows:
Let the total wage bill w.L = k (a constant). Here w is the wage rate and L is the level of employment (in terms of hours of work).
But the wage floor w* that maximises the total wage bill creates an excess supply of labour, amounting to FG. So jobs are to be rationed among union members. In this case, the wage that maximises the total wage bill exceeds the competitive wage w0. It is the wage associated with the intersection of the supply and demand curves at point E. If the labour supply curve intersected the labour demand curve at point F, the wage that maximised the total wage bill would be the competitive wage.
(c) Maximising economic rent:
Sometimes trade unions attempt to maximise the difference between the market wage and the opportunity cost of workers’ time in its best alternative use — that is, to maximise the economic rent earned by union workers. This approach explicitly takes each worker’s opportunity cost into account.
The labour supply curve represents the minimum amount workers must be paid to supply each unit of labour to this particular market. The height of the supply curve at each level of employment represents workers’ opportunity cost of providing that unit of employment.
In order to maximise economic rent, the union should expand employment until the marginal revenue from supplying additional units of labour equals the opportunity cost of supplying those additional units of labour. This point is illustrated in Fig 26.13. At point E the union’s MR curve intersects the labour supply curve. The corresponding employment level (L2) maximises economic rent to employed workers.
Total economic rent is indicated by the area above the labour supply curve but below the wage floor wmax, i.e., wmin wmax FE. This economic rent reflects pure surplus to the workers because it is a payment over and above their opportunity cost, the amount required to attract each additional unit of labour to this market. But, even if this objective is fulfilled, there is a problem.
A huge excess supply of labour is created at the wage floor (FG). However, the union’s goal of rent maximisation allows trade unions act as monopoly sellers of labour. Thus we see that institutional considerations are highly relevant for the analysis of the pricing of labour, i.e., wage determination. After all the wage rate is a bargain-determined and not a market-determined factor price.
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