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Trade Unions In Labour Economics Essays

Trade unions are organisations representing the interests of workers. They were formed to counter-balance the monopsony power of employers and seek higher wages, better working conditions and a fairer share of the company's profits.

Critics of trade unions argue they can be disruptive to firms, discouraging investment and improved working practices. Furthermore, powerful unions can lead to macroeconomic problems such as wage inflation and lost productivity due to strike action.

When Mrs Thatcher came to power in 1979, her stated aim was to reduce the power of unions. She felt that unions were a major contributor to the declining competitiveness of the UK economy. To a large extent, Mrs Thatcher was successful in reducing the power of unions. However, in recent years, an increasingly non-unionised workforce has seen a growth in flexible hours, job insecurity and poor wage growth, suggesting workers have lost out from the decline of trade union power.

Advantages of Trades Unions

1. Increase wages for its members

Industries with trade unions tend to have higher wages than non-unionised industries. Trade unions can pursue collective bargaining giving workers a greater influence in negotiating a fairer pay settlement.
The efficiency wage theory states that higher wages can also lead to improved productivity. If workers feel they are getting a higher wage, they can feel more loyalty towards the firm and seek to work for its success.

2. Counterbalance Monopsony Power

In many industries, firms have a degree of monopsony power. This means firms have market power in employing workers. It enables firms to pay wages below a competitive equilibrium (W2) and also employ fewer workers at Q2. There are many cases of powerful firms making a very high level of profit, but paying relatively low wages.

If firms have monopsony power, then a trade union can increase wages without causing unemployment. Even if a trade union successfully bargained for a wage of W3 - employment stays the same as Q2. If a trade union bargains for W3, it does not create unemployment, but employment stays at Q2.
In the face of Monopsony employers, Trades Unions can increase wages and increase employment. Traditionally, monopsonies occur when there is only firm in a town or type of employment. However, in modern economies, many employers have a degree of monopsony power - related to difficulties of moving between jobs.

3. Represent workers

Trades Unions can also protect workers from exploitation, and help to uphold health and safety legislation. Trades unions can give representation to workers facing legal action or unfair dismissal.

4. Productivity deals

Trades unions can help to negotiate and implement new working practices which help to increase productivity. For example, in wage negotiations, firms may agree to increase pay, on the condition of implementing new practices, which lead to higher productivity. If the trade union is on board, then they can help create good working relationships between the owners and workers.

5. Poor wage growth in non-unionised workforce

Modern labour markets are increasingly flexible with weaker trade unions. These new developments in labour markets have led to a rise in job insecurity, low-wage growth and the rise of zero-hour contracts. Non-unionised labour helps firms be more profitable, but wages as a share of GDP has declined since 2007. Unions could help redress the monopoly power of modern multinationals.

In 2011 there were 6,135,126 members in TUC-affiliated unions, down from a peak of 12,172,508 in 1980. Trade union density was 14.1% in the private sector and 56.5% in the public sector.

6. Reduce inequality

From the late 1890s to 1980s, the UK saw a growth in trade union membership. This was also a period of falling inequality and a reduction in relative poverty. Since trade union membership peaked in the early 1980s, this trend of reduced inequality has been reversed and inequality has increased.

source: Paris School of Economics

Potential disadvantage of Trades Unions

1. Create Unemployment
If labour markets are competitive, and trade unions are successful in pushing for higher wages, it can cause disequilibrium unemployment (real wage unemployment of Q3-Q2).  Union members can benefit from higher wages, but outside the union, there will be higher unemployment.
It is also argued that if unions are very powerful and disruptive, it can discourage firms from investing and creating employment in the jobs. If firms fear frequent strikes and a non-cooperative union, they may prefer to invest in another country with better labour relations. For example, in the 1970s, the UK experienced widespread industrial unrest and this is cited as a factor behind the UK's relative decline.

2. Ignore non-members

Trades unions only consider the needs of its members, they often ignore the plight of those excluded from the labour markets, e.g. the unemployed.

3. Lost Productivity

If unions go on strike and work unproductively (work to rule) it can lead to lost sales and output. Therefore their company may go out of business and be unable to employ workers at all. In many industries, trade unions have created a situation of a confrontational approach.

Decline in trade union density has led to a decline in days lost to strikes.

4. Wage-inflation

If unions become too powerful they can bargain for higher wages above the rate of inflation. If this occurs it may contribute to wage-inflation. Powerful trades unions were a significant cause of the UK's inflation rate of 25% in 1975.


The benefits of trades unions depend on their circumstances. If they face a monopsony employer they can help counterbalance the employers market power. In this case, they can increase wages without causing unemployment. If unions become too powerful and they force wages to be too high, then they may cause unemployment and inflation

It also depends very much on the nature of the relationship between trade unions and employers. If relations are good and constructive, the union can be a partner with the firm in maintaining a successful business, which helps protect jobs and higher wages. However, if relationship between trade unions and the management become confrontational, it can escalate into destructive partnerships which cause a decline in profitability and puts the long-term security of jobs at risk


Lembcke, Alexander (2012) Essays in labor economics. PhD thesis, The London School of Economics and Political Science (LSE).


My thesis combines three distinct papers in labor economics. The first chapter is a collaborative work with Bernd Fitzenberger and Karsten Kohn. In this chapter we scrutinize the effects of union density and of collective bargaining coverage on the distribution of wages both in the covered and the uncovered sector. Collective bargaining in Germany takes place at either the industry or firm level. Collective bargaining coverage is much greater than union density. The share of employees covered by collective bargaining in a single firm can vary between 0% and 100%. This institutional setup suggests that researchers should explicitly distinguish union density, coverage rate at the firm level, and coverage at the individual level. Using linked employer-employee data, we estimate OLS and quantile regressions of wages on these dimensions of union influence. A higher share of employees in a firm covered by industry-wide or firm-specific contracts is associated with higher wages, but there is no clear-cut effect on wage dispersion. Yet, holding coverage at the firm level constant, individual bargaining coverage is associated with a lower wage level and less wage dispersion. A greater union density reinforces the effects of coverage, but the effect of union density is negative at all points of the wage distribution for employees who work in firms without collective bargaining coverage. Greater union density thus compresses the wage distribution while moving the distribution in firms without coverage uniformly. The second chapter evaluates the impact of the UK Working Time Regulations 1998, which introduced mandatory paid holiday entitlement. The regulation gave(nearly) all workers the right to a minimum of 4 weeks of paid holiday per a year. With constant weekly pay this change amounts effectively to an increase in the real hourly wage of about 8.5% for someone going from 0 to 4 weeks paid holiday per year, which should lead to adjustments in employment. For employees I use complementary log-log regression to account for right-censoring of employment spells. I find no increase in the hazard to exit employment within a year after treatment. Adjustments in wages cannot explain this result as they are increasing for the treated groups relative to the control. I also evaluate the long run trend in aggregate employment, using the predicted treatment probabilities in a difference-in-differences framework. Here I find a small and statistically significant decrease in employment. This effect is driven by a trend reversal in employment, coinciding with the treatment. The third chapter considers how the availability of a personal computer at home changed employment for married women. I develop a theoretical model that motivates the empirical specifications. Using data from the U.S. CPS from 1984 to 2003, I find that employment is 1.5 to 7 percentage points higher for women in households with a computer. The model predicts that the increase in employment is driven by higher wages. I find having a computer at home is associated with higher wages, and employment in more computer intensive occupations, which is consistent with the model. Decomposing the changes by educational attainment shows that both women with low levels of education (high school diploma or less) and women with the highest levels of education (Master's degree or more) have high returns from home computers.

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