Flexibility: trade unions, welfare and migration

Overview

Flexibility in a labour market, collective bargaining by a trade union raise pay and reservation wage.

What you need to know

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Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is meant by flexibility in a labour market?

   Model answer

   A flexible labour market is one in which wages, hours, contracts and the allocation of workers between firms, occupations and regions adjust readily to changing conditions. It covers wage flexibility, numerical flexibility in hiring and shedding staff, flexibility of hours through part-time and shift working, functional flexibility in what workers can be asked to do, and the ease with which workers move between jobs and places. Greater flexibility speeds up adjustment but tends to reduce workers' security.

2. 2

   How does collective bargaining by a trade union raise pay?

   Model answer

   Acting alone, a worker has little bargaining power against an employer. A union negotiates for all its members at once and can threaten to withdraw their labour together, which would halt production and cost the employer far more than the pay rise being sought. Faced with that, the employer settles above the wage it would otherwise have offered. In effect the union acts as a single seller of that labour and refuses to supply it below an agreed rate.

3. 3

   Analyse the effect on employment when a union raises the wage above the competitive level in an industry with many competing employers.

   Model answer

   The negotiated wage sits above the level where labour demand crosses labour supply. Firms move up and to the left along the downward-sloping labour demand curve, so the quantity of labour they want falls: they substitute machinery, reorganise the work and, facing higher costs and prices, sell less output. At the same time the higher wage attracts more people into the occupation, so the quantity supplied extends. The horizontal gap between the two is excess supply, made up of workers who lose the jobs they held at the old wage together with the new entrants drawn in by the higher rate who cannot find work, and it shows as unemployment in that occupation.

4. 4

   Why might a union raise pay without causing job losses where the employer is a monopsony?

   Model answer

   A monopsony is the dominant buyer of that labour and holds pay below the competitive level because workers have nowhere else to go, employing fewer people than a competitive market would. If a union bargains for a set rate, the employer can no longer gain by restricting recruitment in order to hold pay down, and taking on more workers at the agreed rate can be worthwhile. Over a range of wages, therefore, union bargaining can raise pay and employment together.

5. 5

   Give two ways in which trade unions can raise productivity and two ways they can lower it.

   Model answer

   They can raise it by giving workers an effective voice, which cuts turnover and retains experience, and by pressing for training and safer conditions, which reduces accidents and lost time. They can lower it by resisting new technology and by insisting on staffing levels or demarcation rules that prevent flexible working, and disruption from industrial action costs output directly. Which effect dominates depends on the relationship between the union and the employer.

6. 6

   Assess whether a decline in trade union membership makes a labour market work better.

   Model answer

   In favour: weaker unions mean pay is set closer to what supply and demand would produce, so fewer workers are priced out of jobs, firms can reorganise and adopt technology more readily, and labour moves more easily to where it is needed. Against: unions exist partly to offset the bargaining power of large employers, so their decline can leave pay below the competitive level where one employer dominates a local market, and it removes a voice that presses for training, safety and fair treatment. The judgement depends on market structure: where employers hold monopsony power, declining union strength is likely to depress pay and employment rather than improve efficiency.

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