A Union Can Raise Wages Through Collective Bargaining

1. A trade union acts as a monopoly seller of labour.
2. Through collective bargaining it can raise wages above the competitive level.
3. In a competitive market, a higher union wage tends to cut employment.

Union Effects Differ in Competitive and Monopsony Markets

1. In a competitive market, a union wage above equilibrium reduces jobs.
2. Against a monopsony, a union can offset the employer's power.
3. There a union can push both the wage and employment towards the competitive level.

Density, the Law and Elasticity Decide Union Power

1. Membership density and the legal framework shape bargaining power.
2. The more inelastic labour demand, the smaller the job loss from a wage rise.
3. A firm's profitability also affects how much it can concede.

Always Show Both Cases

Worked Example: A Union in a Competitive Labour Market

1. Retail assistants in a competitive local labour market earn the market-clearing wage of £11\pounds 11£11/hour, with $2,000$ employed.
2. A union negotiates a wage floor of £13\pounds 13£13/hour, an $18\%$ rise.
3. At £13\pounds 13£13/hour, employers move up their labour demand curve and only wish to employ $1,700$ assistants, a fall of $300$ jobs ($15\%$).
4. At the same wage, $2,200$ workers move along the supply curve and now want a job, creating an excess supply (a queue of unemployed applicants) of $500$ workers.

Worked Example: A Union Against a Monopsony Employer

1. A regional logistics firm is the only major employer of delivery drivers in its area, a monopsonist paying £10\pounds 10£10/hour and employing $300$ drivers.
2. The competitive wage and employment level, where supply would meet demand, is £12\pounds 12£12/hour and $340$ drivers.
3. A drivers' union negotiates a wage floor of £12\pounds 12£12/hour, matching the competitive wage.
4. The firm must now pay £12\pounds 12£12/hour to hire any driver, removing its incentive to restrict hiring to hold down the wage bill, so employment rises to $340$: both the wage (£10→£12\pounds 10 \rightarrow \pounds 12£10→£12) and employment ($300\to 340$) increase together.

Describing the Two Union Diagrams

1. Competitive case: draw D and S crossing at the equilibrium wage, then add a horizontal line at the higher union wage; where this line crosses D gives the lower quantity demanded, and where it crosses S gives the higher quantity supplied, with the horizontal gap between the two showing the excess supply of labour (unemployment or a queue of applicants).
2. Monopsony case: draw S, the steeper MCL curve above it, and the downward-sloping D (= MRP) curve; without a union, employment is where MCL meets MRP and the wage is read down to S, below the competitive level.
3. Adding a union wage floor at the competitive wage makes the effective supply and MCL curves horizontal at that wage up to where the floor meets the original S curve, after which the original upward-sloping S and MCL resume; employment then rises to where this floor meets MRP, at the competitive level.