In the last Learn-it, we looked at the concept of monopsony in terms of one buyer of labour. It is possible to think of examples where there is only one seller of labour. The sellers of labour (i.e. the workers) can achieve some degree of monopolistic power if they all join to form a trade union.
Before we dive into this topic, it is worth thinking about the objectives of trade unions. Why do workers band together rather than deal with employers individually? The obvious answer is that they have more power. But more power to do what?
The two key objectives of a trade union are (i) to negotiate for their members (the workers) as high a pay rise as possible each year (and at least enough to maintain their real earnings) and (ii) to make sure that the working conditions for their members are acceptable and, hopefully, improving.
It is the collective nature of the union that gives them their power. The larger the proportion of the workforce that are members, the more clout they will have with the employers. If an individual tries to negotiate for a higher wage with his employer on his own, he will have very little clout. The employer knows that he can just find another worker if one employee kicks up a fuss (especially if the industry is a low skill one).
If a union with a large membership is refused a pay rise by the employer, the members of the union can vote on whether to go on strike (down tools and stop working!). This will affect the employer where it hurts - his profit level! An employer will be much keener to keep a whole union happy rather than an individual employee acting on his own behalf.
We now need to look at how the introduction of a union will affect the equilibrium situations for the perfectly competitive labour market and the one with a monopsonist employer (i.e. one buyer of labour).
One of the key objectives of a trade union is to keep wages as high as possible. The diagram below shows you what happens when a monopsonist union (i.e. one seller of labour) forces the real wage rate above the market equilibrium.
The equilibrium real wage rate and employment level are W1 and L1 respectively. If a union insisted on a real wage rate for their members of WU then, diagrammatically, there would be no employment offered below this real wage rate and so the supply curve below point A would become non-existent. The bold black line would become the new effective supply curve (WUASU). The new equilibrium is now at point B, giving equilibrium wage and employment levels of WU and LU respectively. Notice that the union's action is futile in a way. Although some of their members have kept their job and have a higher wage, some workers will lose their job.
You may have heard of the closed shop. This is where a worker can only work in a certain industry if he is a member of the relevant union. The union controls the membership of the union and, by implication, the people who are allowed to work in the industry. There was a time when you could only work in, say, coal mining if you were a union member! Of course, this has been outlawed now, but you can see from the diagram how this tactic worked in favour of those lucky enough to be admitted to the closed shop. If the union restricted entry into the industry to just LU workers, then the supply curve would not exist above point C. From this point on, the supply curve would become vertical and go through point B. This leads to the same equilibrium as above, wage WU and employment LU.
This is where it gets interesting! What happens when an employer with buying power clashes with a union with selling power (buying and selling labour, of course)? The diagram below will reveal all.
If this labour market were perfectly competitive, the equilibrium wage and employment level would be WC and LC respectively. If the monopsonist employer dominated this labour market then the equilibrium wage and employment level would be WM and LM respectively. We have already established that competitive labour markets have higher wages and higher employment levels. Will the addition of the monopolist union make things even worse?
If the union push for a wage of WU, will this create more unemployment, as in the example above? Well, the forced wage WU will again mean that the supply curve is flat until point A (it becomes WUASL). But what about the MFC curve? This now does not exist below point C. When the supply curve is horizontal (up to point A) then the MFC is the same line (a flat average factor cost implies an identical marginal factor cost). So the MFC is horizontal, then jumps from point A to point C and then continues on its journey to MFC2. The monopsonist employer maximises his profit using the usual condition, MFC = MRP, which occurs at point B. This gives an employment level of LU and the wage is read off the supply curve to give WU.
So what's the conclusion? Following a union forced wage rise, not only do the workers get a higher wage, but the monopsonist employer actually employs more workers! The best of both worlds! In fact, the union could force the wage rate right up to WC and the numbers employed would keep rising up to LC. It is only when the union forces the wage rate above WC that employment starts to fall in the same way that it did in the previous diagram.
To sum up, competitive labour markets are best and monopsonist employers against weak employees are the worst situation. Unions make things worse if they intervene in a competitive labour market, but improve things (up to a point) if they stand up to the monopsonist employer. Bearing in mind that most labour markets in the UK are, to some extent, imperfect, and most of the larger labour markets have unions, it is probably fair to say that most unions are helping the economy in the sense that they try to force the monopsonistic firms to keep wage rate and employment closer to the efficient levels found in competitive labour markets.
Textbooks tend to give a list of sound reasons why a union might be powerful. These include the number of members (especially the proportion of the workplace that is unionised); the elasticity of the good being produced; the profitability of the employer and the proportion of labour costs to the firm's total cost. But fundamentally, the two major reasons for the decline in the power of the trade unions, especially during the 80s, were deindustrialisation and government legislation.
Deindustrialisation is the rather long word that refers to the move in the UK away from secondary industries (manufacturing, in particular) towards tertiary industries (the service sector). This is a process that has been going on for more than three decades, but it was certainly accelerated during the recession of the early 80s. Many manufacturing jobs were lost during that recession due to high interest rates and the very high value of the pound. Some economists argued that these industries were also over manned, so a certain amount of job shedding was required. Most of our manufacturing industry today produces as much as it did 20 years ago, but with a fraction of the employment levels (more efficient capital helped as well). Of course, these manufacturing industries where heavily unionised, so as numbers employed fell, so did union membership and the power of the unions.
The second factor, the government legislation of the mid to late 80s, is probably the most crucial. The Prime Minister of the time, Margaret Thatcher, was very pro free market. Unions distorted the free working of the labour market, so she didn't like them. Her dislike for the unions was enhanced by her experience of the miners' strike of the early 70s, when she was a minister in the Conservative Heath government. All she could do was sit and watch as the miners effectively brought down the Heath government. This was not going to happen when her time came!
Some people think that she deliberately engineered the miners' strike of the mid 80s. She stock-piled coal so that she could keep the electricity generators running (unlike Heath) and then when the miners were called out to strike by Arthur Scargill (there were no votes on strike action in those days) she was happy to take them on. She knew that she had enough coal to keep the electricity going for up to two years. The miners would never last that long. And so it proved. The miners achieved nothing except bad press. This gave Thatcher a perfect excuse to clamp down on the 'reckless' unions. Secondary picketing and 'flying pickets' were banned, secret ballots were required before strike action could take place and closed shops were banned (although a few informal ones do still exist).
With the added pressure during the tight years of the early 90s, where it was very difficult for weakened unions to push for higher wages, and then the low inflation environment of the UK since then, unions have found it more productive to try and work with their employers rather than fight them. Strike action is almost non-existent nowadays.
During the Blair government Labour took the first action for years to help unions. Many of the 'new' service and technology industries simply did not recognise unions. The Blair government legislated to allow employees in a non-unionised workplace to vote on whether they wanted a union to exist. This did not mean that any of the employees would have to join. It was just a very small step in the other direction. One feels that unions have almost accepted the fact that in a more flexible and efficient economy, their role is reduced. There will be more on the changing face of the UK labour market in the final Learn-it of this topic.