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Impact of Trade Union Wage Increase on Workers

Discuss whether workers always benefit when their trade union achieves an increase in wages.


Labor Market and Income Distribution

[CIE A level November 2019]



Step ➊ : Define ‘trade union’ in the definition.

A trade union is an organisation formed to protect the rights and interests of workers. When a firm is the only employer of a certain type of labour, this situation is called a monopsony and this may lead to the exploitation of workers. Individuals have little power to influence conditions of employment, thus, trade unions use collective bargaining to negotiate with employers. One of the many aims of trade unions is to increase the wages of their members. However, it is often argued that these wage increases do not always benefit all workers.

Step ➋ : Discuss how whether always workers benefit from an increase in wages.

➤ 2.1 Trade unions can introduce a minimum wage in order to increase wages, however, this is only beneficial to an extent.

The introduction of a minimum wage can be shown in the figure below.


At the equilibrium wage, the quantity of labour employed is L. If a strong trade union can force up wages to Wu, which is above the equilibrium, the number of workers who are offered jobs by employers falls to Lu. At this wage, the number of people who would like to work is higher. This is shown by Lc. Consequently, there is a shortfall between those who want to work and those who can actually work, due to the influence of the trade union. This situation can lead to real wage unemployment of Lu to Lc. In this case, the increase in wages will not be beneficial for all workers.

Wage rates can be increased without a reduction in the level of employment only if, as part of the bargain, the productivity of labour is increased. This is called a productivity deal.

Trade unions that try to behave in this way are playing a dangerous game with employers. The fear is that because of high labour costs and restrictive practices, employers will go out of business or transfer production to countries where wage levels are lower

➤ 2.2 The behaviour of trade unions in a monopsony

Bilateral Monopoly occurs in an industry where there is only one producer of a good and only one supplier. It means there is a monopsonist (buyer of labour) and a monopoly (single supplier)


In a competitive labour market, the equilibrium will be where MRPL (demand for labour) = AC1 (supply for labour) at a wage of W0 and a quantity of Q0 of labour will be employed. A Monopsony would maximise profits by employing Q1 workers at a wage rate of W1. (Q1 is where MRPL =MCL). This wage is lower than in a competitive labour market. Monopsony power can, therefore, lead to exploitation of employed workers. A Trade Union could use collective bargaining and bargain for higher wages of W2 without causing a fall in employment. Thus, all workers can benefit from an increase in wages.

Trade unions can also provide education and training to its members. This will help workers get better-paid jobs. Worth workers and employers will benefit from higher labour productivity. Workers will be paid a higher wage for higher-skilled jobs.

Step ➌ : Conclude.

To conclude, a rise in wages might not always benefit employees as it may cause unemployment. However, trade unions may negotiate a higher wage without a fall in employment in a bilateral monopoly. Employees may prefer to accept to increase wages instead of facing strikes. Trade unions can also provide education and training which will help workers get higher paid jobs.

Marking scheme

Discussion and analysis of wage theory in imperfectly competitive labour market. Trade unions influence on wage rates; the negotiation of a higher wage. Examples could include the minimum wage, higher labour productivity (higher MRP) and monopsony.

L4 (9–13 marks): For a discussion of two ways in which trade unions may increase wages and of the extent to which each of these benefits the workers. (Max. 11 if no conclusion)




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