Question

Typically, professions represented by labor unions demand a higher wage. Discuss how labor unions impact wage rates.

Answer 1

A primary goal of trade unions is to maintain and improve the terms and conditions of employees through collective bargaining with employers, particularly workers who are members of the union. Whether unions are successful depends largely on their bargaining power–which is based on their ability to restrict the employer's supply of labor–and on employers ' willingness to offer over-market wages.

The bargaining power of Unions is strengthened by the proportion of all workers they serve, leading to a higher labor wage premium. Where the vast majority of workers in a given industry are protected by union-negotiated collective bargaining salaries, the cost efficiency of the employer is less affected than in situations if rival employers have ready access to non-union labour. This is because both businesses face above-market wage costs.

The effectiveness of Unions in raising wages is further strengthened if the price elasticity of demand for products or services in the sector is weak, as could be the case with monopoly and oligopoly output, as companies may meet additional costs from above-normal profits and pass on additional costs to consumers without excessive fear of being disrupted by other suppliers.

Traditionally, Union wage practices are also motivated by the concept of "fair day pay for a good day's work," so that wages are tied to jobs rather than to the characteristics of people. This wage standardization program, combined with efforts to tackle wage discrimination on grounds of race, sex and disability, is often used to reduce wage differentials

Whether unions actually compress wage differentials depends on the position of unionized workers in pay distribution, the union premium attached to different types of workers, and the degree of centralization and coordination in collective bargaining. Unions may also affect wages more indirectly. For example, their "tone" face extends job tenure, frequently associated with higher wages, and shifts the opportunities employers and employees face when investing in their human capital