AQA Specification focus:
‘The various factors that affect the ability of trade unions to influence wages and levels of employment in different labour markets; how wages and employment are likely to be affected by the introduction of a trade union into a previously perfectly competitive labour market and into a monopsony labour market; the use of relevant diagrams is expected.’
Trade unions can alter wage determination and employment outcomes in both perfectly competitive and monopsonistic labour markets, exerting power depending on bargaining strength, market structure, and institutional context.
Union Power in Labour Markets
Understanding Union Power
Union power refers to the ability of trade unions to negotiate higher wages, better working conditions, or improved job security for their members. This bargaining strength depends on several factors:
Union density: proportion of workers in a sector who are union members.
Legal framework: laws governing union recognition and collective bargaining.
Public opinion and political support: influence of societal and governmental attitudes.
Employer resistance: firms’ willingness to resist or accommodate union demands.
Economic conditions: high unemployment may weaken union bargaining power.
Collective Bargaining: The process where trade unions negotiate with employers over wages, working hours, and conditions of employment on behalf of their members.
Competitive Labour Markets and Unions
In a perfectly competitive labour market, wages are normally determined by the intersection of labour demand (derived from marginal revenue product of labour) and labour supply.
Union wage bargaining raises the wage from We to Wu, reducing firms’ quantity of labour demanded from Qe to Qd, while workers’ quantity supplied rises to Qs. The gap (Qs – Qd) is excess supply of labour (unemployment). The figure helps connect union wage-setting to market outcomes under perfect competition. Source
When a trade union is introduced:
If unions demand a higher wage above equilibrium, employment typically falls, as firms reduce demand for workers.
However, if the union bargains for a wage close to the competitive equilibrium, the employment loss may be small.
Strong unions can also achieve non-wage benefits (training, safety, working conditions) that may improve overall labour supply quality.
Key outcomes in a competitive market with union influence:
Higher wages for unionised workers.
Reduced employment if wage set above equilibrium.
Potential segmentation of labour markets between unionised and non-unionised sectors.
Monopsony Labour Markets and Unions
A monopsony exists when a single employer has significant market power in hiring, allowing them to set wages below the competitive level.
Monopsony: A labour market where one dominant employer has significant control over hiring and wage setting, often leading to lower wages and employment levels than in competition.
In such markets, unions can counteract monopsony power by pushing wages upwards.
The monopsony hires where MCL intersects DL (MRP), yielding low wages and employment. Introducing a union shifts bargaining toward Wu, which can raise both wages and employment toward competitive outcomes. The figure also shows L and the indeterminate wage range between Wu and Wm—an extra detail that clarifies how relative bargaining power determines the final wage.* Source
This can lead to a different outcome compared to competitive markets:
If unions set wages above monopsony wage but below competitive wage, employment can rise, as firms are forced to hire more workers at fairer rates.
If unions demand wages above competitive levels, employment falls, similar to the competitive case.
This means trade unions can have a positive role in monopsony markets by improving both wages and employment outcomes.
Comparative Impacts of Trade Unions
In Competitive Markets
Wage increases above equilibrium → employment falls.
Union strength can create wage rigidity, preventing adjustment during recessions.
May create dual labour markets, with non-union workers under different conditions.
In Monopsony Markets
Union bargaining can raise wages towards competitive levels.
Employment may increase when unions correct underemployment caused by monopsony exploitation.
Trade unions thus enhance both efficiency and equity in monopsonistic settings.
Factors Affecting Union Influence
The degree of union impact differs depending on conditions:
Elasticity of labour demand: if highly elastic, union-driven wage rises cause larger job losses.
Elasticity of labour supply: inelastic supply strengthens union bargaining.
Presence of substitutes: availability of non-union labour weakens union power.
Product market competition: firms in highly competitive industries may resist union wage increases more strongly.
Government policies: minimum wage laws, strike regulations, or collective bargaining recognition affect union leverage.
Advantages and Disadvantages of Union Power
Advantages
Higher wages and better conditions for workers.
Correction of employer power in monopsonistic markets.
Improved worker representation and reduced exploitation.
Potential for greater labour productivity due to improved morale and working conditions.
Disadvantages
Risk of unemployment in competitive markets.
Wage pressures can contribute to inflationary pressures.
Potential for strikes and industrial action, disrupting production.
Possible loss of international competitiveness for firms facing higher labour costs.
Summary of Union Effects
In perfect competition, union wage demands above equilibrium often reduce employment.
In monopsony, unions can raise both wages and employment if their demands remain within competitive limits.
Union effectiveness depends on structural, legal, and economic factors shaping bargaining outcomes.
FAQ
Trade unions generally have greater leverage when negotiating with large firms, as these firms rely on a large workforce and disruption costs are higher.
In smaller firms, the threat of industrial action is less impactful, and employers may resist wage increases more strongly due to tighter profit margins.
If demand for labour is inelastic, unions can raise wages with little reduction in employment because firms cannot easily substitute away from labour.
However, if demand is highly elastic, even in a monopsony, significant wage rises may reduce employment sharply.
Non-wage benefits such as training, pensions, or flexible hours can improve workers’ welfare without raising costs excessively.
Employers may accept these because they avoid large wage increases while enhancing worker productivity and retention.
Government policies on recognition rights, collective bargaining laws, and strike regulations directly affect how strongly unions can negotiate.
Supportive legal frameworks strengthen unions’ ability to counter monopsony power, while restrictive laws reduce their effectiveness.
If unions demand wages well above competitive levels, employers may cut employment significantly.
This could weaken union credibility, reduce membership, and harm workers who lose jobs as a result.
Practice Questions
Define a monopsony in the context of the labour market. (2 marks)
1 mark for identifying that a monopsony is a market with a single or dominant buyer/employer of labour.
1 mark for explaining that this gives the employer wage-setting power, often leading to wages below the competitive level.
Using an appropriate diagram, explain how the introduction of a trade union into a monopsony labour market can affect wages and levels of employment. (6 marks)
1 mark for correctly labelling and drawing a monopsony labour market diagram (with labour demand, supply, marginal cost of labour, and monopsony wage and employment).
1 mark for showing the union-negotiated wage above the monopsony wage but below the competitive wage.
1 mark for identifying that the union can raise wages for workers.
1 mark for identifying that employment can increase compared to the monopsony outcome.
1 mark for explaining that this occurs because the monopsonist is forced to hire more workers at the union wage.
1 mark for noting that if the union sets the wage above the competitive level, employment will fall.
