Trade unions and their relative bargaining power on wage determination

Published by Patrick Mutisya · 14 days ago

Cambridge IGCSE Economics 0455 – Microeconomic Decision‑Makers: Workers

Microeconomic Decision‑Makers – Workers

Objective

Understand how trade unions influence wage determination and evaluate the factors that affect their relative bargaining power.

1. What is a Trade Union?

A trade union is an organised group of workers that seeks to protect and promote the economic interests of its members, primarily through collective bargaining with employers.

2. The 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, industrial action (e.g., strikes) may be used as a bargaining tool.

3. How Trade Unions Influence Wage Determination

The wage that a worker receives can be expressed as:

\$ w = w{m} + \Delta w{u} \$

where:

  • \$w_{m}\$ = market‑determined wage (based on supply and demand for labour).

  • \$\Delta w_{u}\$ = wage premium resulting from union activity (positive if the union can push wages above the market level).

4. Factors Affecting a Union’s Relative Bargaining Power

The ability of a union to secure higher wages depends on a range of internal and external factors. These are summarised in the table below.

FactorExplanationImpact on Bargaining Power
Membership DensityProportion of workers in an industry who are union members.Higher density → stronger collective voice.
Skill Level of WorkersSpecialised or scarce skills increase worker indispensability.Skilled workers → greater leverage.
Availability of Substitute LabourEase with which employers can replace striking workers (e.g., through automation or temporary staff).More substitutes → weaker bargaining position.
Legal FrameworkNational laws governing union rights, strike legality, and collective bargaining.Supportive laws → enhanced power; restrictive laws → reduced power.
Economic ConditionsOverall unemployment rate and business profitability.High unemployment → lower power; booming economy → higher power.
Public Opinion & MediaSocietal attitudes towards unions and coverage of industrial action.Positive perception can pressure employers; negative perception can undermine union demands.
Union ResourcesFinancial assets, legal expertise, and organisational capacity.Well‑resourced unions can sustain longer disputes and negotiate more effectively.

5. Illustrative Example

Consider a manufacturing sector where the equilibrium market wage is $10 per hour. A strong union with high membership density and skilled workers negotiates a 20 % wage premium.

\$ w = 10 + 0.20 \times 10 = 12 \text{ dollars per hour} \$

In contrast, if the same sector experiences a rise in unemployment and the union’s membership falls, the premium might shrink to 5 %:

\$ w = 10 + 0.05 \times 10 = 10.5 \text{ dollars per hour} \$

6. 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 can expose domestic unions to competition from lower‑cost overseas producers.

7. Summary Checklist

  • Identify the key determinants of a union’s bargaining power.

  • Explain how these determinants affect the wage premium (\$\Delta w_{u}\$).

  • Analyse real‑world scenarios where unions succeed or fail to influence wages.

Suggested diagram: Supply and demand for labour with a union‑induced wage premium shifting the equilibrium wage above the market‑determined level.