trade unions and wage negotiations
"Workers who are non-unionised are more at risk of low pay. Women
who work in non-unionised workplaces earn on average two-thirds of the
of their male counterparts, whilst those women who are union members
earn nearly 90 per cent"
(Source: TUC Labour Market Research 2000)
In theory unions might exercise their collective bargaining power to partially offset the purchasing power of an employer in a particular occupation and in doing so achieve a mark-up on wages compared to those on offer to non-union members.
But for this to happen, a union must have some control over the total labour supply available to an industry. In the past this was possible if a union operated a closed shop agreement with an employer – i.e. where the employer and union agreed that all workers would be member of a particular union.
However in most sectors, the closed shop is now history. Trade union reforms in the 1980s brought an end to the closed shop in a bid to increase the flexibility of the labour market. Closed shops still exist in a few occupations, for example the actor’s union but for the vast majority of workers, this is no longer a relevant issue.
More frequently, a union may simply bid through bi-lateral negotiations with employers to achieve an increase in wages ahead of the rate of inflation so that real wages rise, and other improvements to working hours and conditions. It is often the case that employers will insist on some form of performance-related element to any pay settlements, for example an agreement on measures designed to boost productivity.
The balance of power between employers and trade union in their periodic wage negotiations depends on a range of factors:
1. The rate of unemployment - when labour is scarce, either in a local labour market or taking a national perspective and there are perceived shortages of skilled workers, then the balance of power tilts towards unions
2. Competitive pressures in product markets – when a firm is enjoying a dominant monopoly position and high levels of abnormal profit, the unions will know that the employer has the financial resources to meet a more generous wage settlement (although unions rarely have the full financial information available to a business at their finger tips when negotiations are in progress). When demand for a product is price inelastic, so the demand for labour will tend to be relatively inelastic, this gives the union the opportunity to boost the total earnings of its members through collective bargaining. The reverse is true in markets where demand for the final output is highly elastic.
Globalisation is making the derived demand for labour more elastic and leading to a decline in the ability of unions to drive wages high, independent of the level of productivity in an industry.
3. Macroeconomic conditions - during a recession or where competitive pressures in a market are intense and profit margins have been squeezed the employer is far less likely to accede to ambitious pay claims. The strength of the exchange rate for example is often a key factor in pay discussions for firms who export a large percentage of their total output. When unemployment is rising, growing fears for job security also affect pay demands. Unions are always less powerful when the demand for labour is falling and labour is less scarce
The diagram below shows how collective bargaining might lead to the market wage rate being “bidded-up” or where a union operating a closed shop might restrict the labour supply to put upward pressure on wages. In theory wages for union members can be raised above those of non-members, but there is a potential trade-off with employment and the extent to which unions are prepared to risk a loss of jobs may determine how high they set their wage demands.
When the demand for labour in inelastic (the right hand diagram above) a fall in labour supply drives up the wage rate, but the employment effects are relatively small, indeed the total reward to labour (W2 x E2) is higher. Contrast this with the left hand diagram where labour demand is more responsive to the market wage rate and where the decline in employment reduces the total earnings to workers in this industry.
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