Labour markets, wages and trade unions
Key terms
Define each term.
Multiple choice
Circle the correct answer.
The demand for labour is described as a derived demand. This means:
Which factor would most increase a trade union's bargaining power?
Worked problems
Show your working.
Whether a pay rise is affordable for the employer. A firm employs 200 workers at $30,000 a year and makes an annual profit of $2.4 million. A union demands a 10% pay rise. Calculate the extra wage cost and the effect on profit. Then calculate the productivity gain that would make the rise self-financing.
Diagrams
Draw a labour market diagram with the wage rate on the vertical axis and the quantity of labour on the horizontal axis. Mark the equilibrium wage. Draw a national minimum wage above it and label the quantity of labour demanded, the quantity supplied and the unemployment that results. On a second diagram, show a rise in the demand for labour and its effect on the wage and employment.
Draw a labour market diagram with the wage rate on the vertical axis and quantity of labour on the horizontal axis, showing demand for and supply of labour meeting at the equilibrium wage. Then show the effect of a trade union successfully negotiating a wage above the equilibrium, marking the number of workers firms wish to employ and the number wishing to work at that wage.
Answers
Trade union: An organisation of workers that negotiates collectively with employers over pay, conditions and job security on behalf of its members.
Division of labour: Breaking production into separate tasks, with each worker specialising in one task.
B. Employers hire workers not for their own sake but to produce output. If demand for the product collapses, demand for the workers making it collapses too, whatever the wage. This is why unemployment rises in a recession even when workers would accept lower pay.
B. Bargaining power rests on how costly it would be for the employer to do without the members. Skills that cannot be replaced quickly make industrial action expensive for the employer and therefore make the threat credible. Losses, low membership and high local unemployment all weaken the union's position.
Step 1. Calculate the current wage bill. 200 x $30,000 = $6,000,000 a year.
Step 2. Calculate the extra cost of the rise. 10% of $6,000,000 = $600,000 a year. Each worker's pay rises by $3,000.
Step 3. Find the effect on profit. $2,400,000 - $600,000 = $1,800,000. Profit falls by a quarter, from $2.4m to $1.8m. The firm remains profitable, which weakens any claim that the rise is unaffordable.
Step 4. Find the self-financing productivity gain. The rise pays for itself if output per worker rises enough to generate an extra $600,000 of contribution, which is 10% of the wage bill. Since wage costs rise 10%, unit labour costs are unchanged if productivity also rises 10%. Below that, unit costs rise and the firm must absorb the difference or raise prices.
Step 5. State what the calculation leaves out. It assumes employment is unchanged. A firm facing higher wage costs may reduce hours, slow recruitment or substitute capital for labour, so the union may secure a higher wage for those who remain at the cost of jobs for others. That trade-off is the central evaluation point in every union question.
The link to productivity in step 4 is the strongest argument a union can make and the one examiners credit most. A pay rise matched by a productivity rise leaves unit labour costs unchanged and is therefore neither inflationary nor a threat to employment.
The minimum wage line must be above the equilibrium to have any effect. The gap between the two quantities is the unemployment it may cause.
Label the gap between the two quantities. That gap is the excess supply of labour, which is unemployment caused by the wage being above the market-clearing level. Showing it is what turns 'unions can cause unemployment' from an assertion into analysis, and the same diagram serves for a minimum wage.