The following article will guide you about the extent to which trade unions are capable of increas­ing wages for the workers of a particular industry.

Trade (labour) unions are organisations of employees established to bargain with employers concerning wages, houses and conditions of employment. Unions are democratic institution whose central purpose is improving the economic conditions of their members. Unions exist in most democratic societies as a basis for providing workers with a means of representative and with a voice in determining their wages and making conditions.

Generally, it is believed that unions tend to raise the wages of their members. However, some economists dispute the ability of unions to raise the wages of workers above general market equilibrium levels.

Trade unions exist to protect the interests of their members by providing the numerous workers with a collective, and hence an effective voice in dealing with the few employers on such other conditions of work as safety, hours holidays and non-wage benefits. A trade union is primarily concerned with the level of wages and other forms of remuneration paid to its members.


In order to raise wage, a trade union (i.e., a group of workers who combine to protect their interests) needs to negotiate with and put pressure on employers. By combining in unions, workers can begin to match the power that employers have over them. Collective bargaining, where group of workers appoint representatives to bargain with the representatives of employers, is an attempt to alter the balance of power, in the worker-employer relationship.

Trade unions desire to raise the wages and improve working conditions of their members. They accomplish this by using their market power. As Paul Samuelson has put it, “Unions gain market power by obtaining a legal monopoly on the provision of labour services to a particular firm or indus­try. Using this monopoly, they compel firms to provide wages, benefits and working conditions that are above the competitive levels”. For example, if non-union plumbers earn Rs 10 per hour in Calcutta, a union might bargain with a large construction firm to set the wage at Rs 15 per hour for that firm’s plumbers.

Such an argument will, however, last only if the firm’s access to alterna­tive labour supplies can be restricted. This means that under a typical collective bargaining agreement “firms agree not to hire non-union plumb­ers, not to contract out plumbing services, and not to sub-contract to non-union firms. Each of these provisions helps prevent erosion of the union’s monopoly lock on the supply of plumbers to the firm”.

In some industries like autos and steel, unions even try to unionise the entire industry so that the firm A’s unionised workers need not compete with firm B’s non-union workers. All these steps are necessary to protect high union wage rates.


Unions affect both wages and employment. In this context, we may refer to two cases, depending on whether labour is hired competitively or monopolistically.

1. Monopsony (a single buyer):

Suppose a trade union enters a competitive labour market and raises the wage rate about the equilibrium level. By doing so it sets a minimum wage below which no one will work. This very fact changes the supply curve of labour. The industry can hire as many workers as are prepared to work at this union-determined wage, but none at a lower wage.

Thus, the industry (and each firm) faces a labour supply curve which has two segments. It is horizontal at the level of the union wage up to the quantity of labour willing to work at that wage and upward sloping there­after. (The same thing will happen if the government sets a minimum wage above the equilibrium level).


Fig. 3 shows how a trade union that faces many buyers of labour can raise wages above the competitive level. Competitive equilibrium is at point E. When the union sets a standard wage w1 (which is above the equilibrium level) the labour-supply curve becomes perfectly elastic up to the quantity Z2, which is the amount of labour willing to work at the wage w1.

Wage Determination by a Single Union Facing Many Employers

The new supply curve of labour is completely elastic (horizontal) up to point G (i.e., w1FG) and then rises upward (GS). Equilibrium is at F, with l2 workers employed, and l2 – l1 willing to work at the going wage rate but enable to find employment.

Thus, if this method of raising wages is followed there will be disequili­brium in the labour market. There will exist a large number of workers who would like to work at a lower wage but are not permitted by the trade unions to do so.

This very fact creates a problem for the union if it seeks to represent all employees in the industry or occupation. Thus, there is likely to be a conflict of interests between the union’s employed members and the unem­ployed ones.

The excess supply of labour will tend to create pressure to cut the wage rate, but the union has to be firm and determined to resist this pressure if its objective (i.e., the higher wage) has to be maintained over a period of time. As Lipsey put it, “A union can raise wages above the competitive market level, but only at the costs of lowering employment and creating an excess supply of labour with its consequent pressure for wage-cutting”.

2. Bilateral Monopoly — a Monopsonist facing a Monopolist:

We may now consider a different type of situation. Here, we consider the effects of introducing a union into the monopsonistic labour market.

Now, the monopsonistic employer’s organisation faces a monopoly un­ion, which means that the two sides will have to settle the wage through collective bargaining. The final outcome of this bargaining process will depend on the objective that each side sets and the relative skill of each side in bargaining for its objective. Let to itself, the employer’s organisation will set the monopsonistic wage.


Now, the question is: what is the range over which the wage may be set after the union enters the market? To answer this question we have to know what the union would do if it had the power to set the wage unilaterally. The result will clearly indicate the union’s objectives in the actual collective bargaining process.

Let us suppose, then, that the union can set a minimum wage at which its numbers will work. Now, employers do not stand to gain by deciding not to employ extra workers for fear of driving the wage up or of reducing the number of workers hired (or the quantity of labour demanded) in the hope of pushing the wage rate down.

Thus, here, as in the case of a wage-setting union in a competitive market, the union presents the employer with a competitive elastic labour- supply curve (up to the maxi­mum number of workers willing to accept work at the union wage). As shown in Fig. 4, by presenting the monop­sonist with a fixed wage, the union can raise wages and em­ployment above the monopsonistic level.

Wage Determination by Collective Bargaining


In a monopsony situation (where labour is supplied competitively) l3 workers are employed at a wage of wm. If now a union sets its wage at w0, the supply curve follows the horizontal line from w0 to E, and then rises along the line S. So equilib­rium is at point E and the level of employment is l0.

If the union sets a wage above w0, it has to tolerate a lower level of employment than l0. For example, at a wage of wu, the labour supply curve is wuFGS. This yields the same level of employment, l1, as when the market was dominated by the monopsonist, but at the much higher wage of wu. At that wage rate, the number of workers unemployed would be l1 – l2. These people are willing to work at a lower wage but are not permitted by the union to do so.

As Lipsey has put it, “Because the union turns the firm into a price-taker in the labour market, it can stop a firm from exercising its monopsony power and thus raise both wages and employment to the competitive level”.

So, in reality, wages are not determined by market forces of demand and supply put by collective bargaining between the trade union and the em­ployer. And collective bargaining in the labour market is an example of bilateral monopoly. The employer would like to establish the monopsonistic wage and the union would not want a wage below the competitive level.


The union may attempt raise wages further by sacrificing its employment objective (i.e., by tolerating more unemployment). If the union is quite satisfied with the level of employment as low as would occur at the monopsonistic wage, it could target for a wage much higher than the free market wage. However, the actual outcome of collective bargaining depends on such things as “what target wage the two sides actually set for themselves, their relative bargain­ing skills, how each side assesses the cost of concessions, and how serious a strike would be for each”.

Supply Restriction:

Trade unions can also raise g, wages by restricting the supply of labour as shown in Fig. 5. If this method is followed, trade unions can maintain any given target wage without cre­ating a pool of workers, who are available to work at the go­ing wage rate but are unable to find jobs.

Raising Wages by Restricting Supply

With free entry into the occupation, the supply curve S0 and the demand curve D intersect at point E to set an equilibrium wage of w0 with employment of Z0. If entry is restricted to the quantity h, the supply curve is ABS1. Labour market reaches equilib­rium at point F and the new equilibrium wage rate is w1. There is no excess supply at point F.

If, instead, the wage had been fixed at w1 without controlling entry, there would be excess supply of labour of l2-l1. These people, who are willing to work at a lower wage but not permitted by the trade union to do so, are tempted to work for less than the union wage, and thus can weaken the union’s ability to maintain a high wage rate.


Fig. 6 shows the effect of setting a standard wage above the equilibrium (mar­ket-clearing) level through some agreement. New equi­librium is at F where the hori­zontal supply curve of labour intersects the employers’ de­mand curve.

High Standard Wage and Unemployment

If the standard wage is set at wsws the em­ployment level in the unionised labour market falls. It may be noted that the union has not directly reduced supply when it sets high standard wage rates. At this high wage rate, which is above the market clearing level, employment is limited by the firms’ demand for labour.

The number of job-seekers exceeds the number of jobs available by the distance EF. These excess workers might be unemployed or waiting for vacancies in the high-paying union sector, or they might become mentally depressed and look for jobs elsewhere. The workers from E to F are as effectively excluded from jobs as if the union had directly limited entry. If unions raise wages to a very high level for entire economy, firms will demand E, while workers will supply F. Thus, the distance EF measures the magnitude of classical (real-wage) unemployment.

This method has been used frequently in most non-socialist countries over the years. However, the key requirement, as Lipsey has put it, “is that the supply of persons offering themselves for employment can be control­led. This can be done by unions that can restrict membership and have closed-shop agreements preventing non-members from being employed. It can also be done by professional associations that license those allowed to practise .the profession; entry can then be reduced by raising standards of entry”. In a closed-shop only union workers can be em­ployed.



In collective bargaining be­tween firms and unions, there is usually a substantial range over which wages may be set. Such a situation is shown in Fig. 7. The figure shows that there is often more than one mutually acceptable outcome to the bargaining process.

Collective Bargaining between the Union and one Employer

The supply Curve of persons who would like to work in the industry under consideration is given by Sl, but the union is assumed to have restricted entry to l0. The single employer (one firm or an employers’ association) has a MRP curve for this labour.

The supply curve indicates that l0 workers could be willing to work for wmin. The MRP curve indicates that the employer would be willing to employ l0 workers at any wage up to wmax. Both sides would prefer any wage between wmin and wmax rather than have no agreement at all.

Theoretical Indeterminacy of Collective Bargaining:

In most collective bargaining negotiations, the workers press for higher wages while management seeks to keep wages and compensation at low levels. Such a situation is known as bilateral monopoly — where the buyer faces one seller. The final outcome of collective bargaining cannot be predicted from costs and demands alone. Psychology, politics and numerous non-economic considerations play role here.


To conclude with Lipsey, “the union’s ability to raise the wage rate, and increase the employment of its members, will depend partly on the size of the profits in the industry, and partly on the current state of the firm’s market. The current market conditions will determine the relation between the losses resulting from hiring more than the desired quantity of labour at the agreed wage rate and the expected losses resulting from a strike”.

Under recessionary conditions, when costs are high and profits are low, firms may have a strong incentive to develop new technology that will eliminate the unneeded workers by replacing their jobs with machines.