Trade unions and their relative bargaining power on wage determination

Micro‑economic Decision‑Makers – Workers (Cambridge IGCSE 0455 3.3)

Learning Objectives

• Explain how wages are determined in a competitive labour market.
• Describe the role of trade unions and the national minimum wage in influencing wage levels.
• Identify and evaluate the factors that affect a union’s relative bargaining power.
• Analyse occupational choice (wage & non‑wage factors), labour mobility, division of labour, wage differentials and the four types of unemployment.
• Apply the concepts to real‑world examples and exam‑style questions.

1. Wage Determination in a Competitive Labour Market

In a perfectly competitive labour market the wage rate is set where the quantity of labour demanded by firms equals the quantity of labour supplied by workers – the labour‑market equilibrium.

• Demand for labour is derived from the marginal product of labour (MPL) and the price of the output it helps to produce.
  • Higher MPL or a higher output price → demand curve shifts right → higher equilibrium wage.
• Supply of labour reflects workers’ willingness to work at different wages. Influences include population size, education levels, alternative income, and cultural attitudes.
  • More workers willing to work at a given wage → supply curve shifts right → lower equilibrium wage.

Diagram suggestion: Labour‑market supply (S) and demand (D) curves intersect at the market‑determined wage w_m and employment Q_m.

2. Policy Tools that Influence Wages

2.1 Trade Unions and Collective Bargaining

• Definition: An organised group of workers that seeks to protect and promote the economic interests of its members, principally through collective bargaining with employers.
• Collective bargaining process
  1. Union representatives negotiate with employer representatives.
  2. Negotiations cover wages, working conditions, benefits and job security.
  3. If an agreement cannot be reached, unions may use industrial action (e.g., strikes) to increase pressure.
• Union wage premium – the extra amount a union member earns above the market‑determined wage: $$ w = w_{m} + \Delta w_{u} $$ where w = actual wage, w_m = market wage, and Δw_u = union premium.

2.2 National Minimum Wage (NMW)

• Definition: Legally‑mandated lowest hourly rate that employers must pay workers aged 16 and over.
• Purpose: Protect low‑paid workers, reduce in‑work poverty and set a floor for wage negotiations.
• Effect on the labour market – the NMW acts as a price floor.
  • If set above the market wage, the supply curve is effectively shifted left (more workers attracted) while demand may fall, creating a surplus of labour (unemployment) at the minimum‑wage level.

Diagram suggestion: Show the NMW as a horizontal line above w_m, indicating the resulting excess supply (unemployment) at that wage.

3. Factors Affecting a Union’s Relative Bargaining Power

4. Occupational Choice – Wage and Non‑Wage Factors

Occupational choice is the decision made by a worker about which job or career to pursue.

• Wage factors – expected earnings, overtime rates, bonuses, and the likelihood of future pay rises.
• Non‑wage factors
  • Working conditions (health & safety, hours, shift patterns)
  • Job security and contract type
  • Career prospects, training and promotion opportunities
  • Location, commuting time and family considerations
  • Personal interest, job satisfaction and status

5. Labour Mobility

• Occupational mobility – moving from one occupation to another, often after retraining, to obtain higher wages or better conditions.
• Geographical mobility – relocating to a different region or country for work. This changes the local supply of labour and can affect regional wage levels.
• Macro‑economic impact – Greater mobility helps the economy adjust to structural change, reducing long‑term unemployment.

6. Division of Labour

7. Wage Differentials

Differences in wages between workers arise from a range of factors. In exam answers, link each factor to either supply‑side or demand‑side effects.

• Skill level and experience (human capital)
• Industry (e.g., finance vs. retail)
• Geographical location (urban vs. rural)
• Gender and ethnicity (pay gap)
• Collective bargaining power (unionised vs. non‑unionised)
• Government policy (minimum wage, tax incentives, subsidies)

8. Types of Unemployment (Cambridge definition)

9. Impact of Unions on Unemployment

• Higher wage premiums raise production costs; firms may cut staff or adopt labour‑saving technology → can increase structural unemployment.
• If unions secure higher wages while demand for the product is price‑elastic, firms may reduce output → can contribute to cyclical unemployment.
• Strong unions can improve job security and reduce turnover → may lower frictional unemployment.

10. Illustrative Numerical Example

Assume the market‑determined wage in a manufacturing sector is $10 per hour.

• Strong‑union scenario: High membership density and skilled workers secure a 20 % premium. $$ w = 10 + 0.20 \times 10 = 12 \text{ dollars per hour} $$
• Weakening‑union scenario: Rising unemployment reduces membership; the premium falls to 5 %. $$ w = 10 + 0.05 \times 10 = 10.5 \text{ dollars per hour} $$

11. Limitations of Union Power

• Excessive wage demands can lead to job losses if firms cut staff to control costs.
• Prolonged strikes may erode public support and damage the union’s reputation.
• Globalisation exposes domestic unions to competition from lower‑cost overseas producers, weakening bargaining position.

12. Summary Checklist (Exam‑style)

• Explain how the labour‑market equilibrium determines the market wage w_m.
• Define the national minimum wage and describe its effect as a price floor.
• State the definition of a trade union and the collective‑bargaining process; write the union‑premium formula w = w_m + Δw_u.
• Identify the internal (membership density, skill level, resources) and external (substitutes, legal framework, economic conditions, public opinion) factors that affect a union’s relative bargaining power and evaluate their impact.
• Discuss how unions can reduce frictional unemployment but may increase structural or cyclical unemployment.
• Recall the four determinants of occupational choice (wage & non‑wage) and give examples.
• Distinguish occupational and geographical labour mobility and explain their macro‑economic significance.
• List the advantages and disadvantages of division of labour.
• Outline the main causes of wage differentials.
• Define and give an example of each type of unemployment (frictional, structural, cyclical, seasonal).
• Analyse a real‑world case where a union succeeded (e.g., UK National Health Service nurses’ pay negotiations) or failed (e.g., 1984‑85 UK miners’ strike) to illustrate the concepts.