The Economics of Unions - Weebly



New Education Policy

The Malaysian government has backed a radical new plan to improve education. The have decided that schools will be paid for their academic success. The amount of money a school receives will be determined by the number of A/A* grades it gets. Marlborough has decided that the best way to ensure students work hard is to employ them ie give students working contracts (a monthly wage). These now have to be finalized.

The meeting with the headmaster is approaching fast; you and your year group have some important decisions to make. Not only wages but matters such as length of holidays, uniform, times of the school day, quality of food provided etc. are also to be decided.

1. Would you rather;

a. One maybe two students go to the meeting and represent the whole year, and so all students receive the same contract or,

b. Students represent themselves on an individual basis and so contracts are different from one student to the next?

I would choose option

Because:

2. What are the benefits of each option?

3. What are the drawbacks of each option?

1. What is collective bargaining?

2. Go to the website tuc.co.uk . Click on ‘join a union’. Find out:

a) Why someone should join a union b) the financial benefits c) how workers rights are protected d) the greater opportunities that arise from being part of a union

b) Find in your textbooks the four functions of a trade union

3. Using you textbook, diagrammatically show and then explain two possible consequences of trade union intervention in the labour market that may result in higher wages.

4. What is the insider-outsider problem?

5. Watch ‘the dance of the lemons’ on our website. Describe the problem illustrated.

6. Do you think an economy is better with or without trade union? Give a full explanation for your answer. (complete the reading that follows and refer to your textbooks)

Extension Reading

The Economics of Unions

A union is a group of sellers acting in the hope of exerting their joint market power. You may discuss terms of employment as an individual, but workers in a union do so as a group. The process by which unions and firms agree in the terms of employment is called collective bargaining.

When a union bargains with a firm, it asks for higher wages, better benefits, and better working conditions than the firm would offer in the absence of a union. If the union and the firm do not reach agreement the union can organise a withdrawal of labour from the firm, called a strike. Because a strike reduces production, sales and profit, a firm facing a strike threat is likely to agree to pay higher wages then it would otherwise would. Economists who study the effects of unions typically find that union workers earn about 10 to 20 per cent more than similar workers who do not belong to unions.

When a union raises the wage above the equilibrium level, it raises the quantity of labour supplied and reduces the quantity of labour demanded, resulting in unemployment. Those workers who remain employed are better off, but those who were previously employed and are now unemployed at the higher wage or worse off. Indeed, unions are often thought to cause conflict between different groups of workers – between the insiders who benefit from high union wages and the outsiders who do not get the union jobs.

The outsiders can respond to their status in one of two ways. Some of them remain unemployed and wait for the chance to become insiders and earn the high union wage. Others take jobs in firms that are not unionised. Thus, when unions raise wages in one part of the economy, the supply of labour increases in other parts of the economy. This increase in labour supply, in turn, reduces wages in industries that are not unionised. In other words, workers in unions reap the benefit of collective bargaining, while workers not in unions bear some of the costs.

Are Unions Good or Bad for the Economy?

Economists disagree about whether unions are good or bad for the economy as a whole. Let’s consider both sides of the argument.

Critics of unions argue that unions are merely a type of cartel. When unions raise wages above the level that would prevail in competitive markets, they reduce the quantity of labour demanded, cause some workers to be unemployed, and reduce the wages for the rest of the economy. The resulting allocation of labour is, critics argue, both inefficient and inequitable. It is inefficient because high union wages reduce employment in unionised firms below the efficient, competitive level. It is inequitable because some workers benefit at the expense of other workers.

Advocates of unions contend that unions are a necessary antidote to the market power of firms that hire workers. The extreme case of this market power is the “company town”, where a single firm does most of the hiring in a geographic region. In a company town, if workers do not accept the wages and working conditions that the firm offers, they have little choice but to move or stop working. In the absence of a union, therefore, the firm could use its market power to pay lower wages and offer worse working conditions than would prevail if it had to compete with other firms for the same workers. In this case, a union may balance the firm’s market power and protect the workers from being at the mercy of the firms owners.

Advocates of unions also claim that unions are important for helping firms respond efficiently to workers’ concerns. Whenever a worker takes a job, the worker and the firm must agree on many attributes of the job in addition to the wage rate: hours of work, overtime, vacations, sick leave, health benefits, promotion schedules, job security, and so on. By representing workers’ view on these issues, unions also allow firms to provide the right mix of job attributes. Even if unions have the adverse effect of pushing wages above the equilibrium level and causing unemployment, they have the benefit of helping firms keep a happy and productive workforce.

In the end, there is no consensus among economists about whether unions are good or bad for the economy. Like many other institutions, their influence is probably beneficial is some circumstances and adverse in others.

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Do you favour collective action or individual initiative?

Do you trust the union’s leaders?

Do you want somebody else speaking for you in dealings with your employer?

Do you think you will be dismissed if you sign a union card – or that that the company will send your job overseas if a union if organised?

What claims do advocates of unions make to argue that unions are good for the economy?

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