The influence of labour unions on wages has been hotly debated over the last decades.

| November 24, 2016

Question 3: Labour unions

The influence of labour unions on wages has been hotly debated over the last decades. Textbook economics would suggest that the introduction of labour unions in wage negotiations would lead to upward wage pressure, reducing employment.

The influence of unions in a labour demand / supply framework usually runs through the labour supply curve. So let’s focus on that curve. The labour supply curve can be derived using a trade off between leisure and (earning) income. The upper panel of Figure 1 gives such a trade off.

a) Show that trade-off in the upper panel of Figure 1 and use it to derive an upward sloping labour supply curve in the lower panel. Justify your answer.

Figure 1

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The analysis in sub question a) does not incorporate the presence of a labour union.

b) Use Figure 2 to demonstrate the consequences for the wage and employment outcome of introducing a labour union. Justify your answer.

Figure 2

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Though textbooks would suggest that the presence of labour unions would lead to higher wages (i.e. wage pressure), reality is (as per usual) more complex. Empirical evidence seems to suggest that wage pressure because of labour unions depends on the degree of centralisation of wage negotiations. That is, if the wage negotiations predominantly take place at the firm level (so firms negotiate with the labour union representing the employees of the firm), wage pressure is limited (for example in the US). If wage negotiations take place at the sector level, wage claims are relatively significant (Australia?). If wage negotiations take place at the national level, wage claims are moderate again (Sweden).

Figure 3 shows this ‘humped shaped’ relation between the degree of centralisation and wage pressure.

c) Explain this phenomenon.

Figure 3

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Unions may not only negotiate wages for employees, they may also be involved in bargaining non-wage income. 13th month pay is such an example. Assume you’ll get it regardless how many hours you work per week.

d)Use Figure 1 to demonstrate what the impact of the introduction of 13th month pay would be on labour supply.

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