Evaluate the view that trade unions raise wage rates but reduce levels of employment. A trade union is an association of workers formed to protect and promote the interests of its members. A union’s main function is to improve wages and other conditions of work; this is usually done through bargaining with the employers. Trade unions exist because an individual worker has very little power to influence any decisions made by an employer. By joining together, workers have more chance of having a voice and being heard by the employer. However, when trade unions raise wage rates, this may result in the demand for labour falling, causing employment to fall. The following diagram illustrates the marginal revenue productivity of labour:
At the original equilibrium point for the employer, Y, employment is at L*, whilst wages are at W, which is a wage considered by the workers and trade unions as too low. Therefore, the trade unions fought for better pay, thus, moving to wage level W1 on the graph. As we assume firms to be profit maximisers, they would want to ensure that they remain somewhere on the MRPL line and make sure that the Marginal Cost of Labour does not exceed the Marginal Revenue Productivity of Labour. Therefore, as wages have risen to W1, it has caused the firm to reduce the amount of people they employ, as any people employed after L1* would not be profitable, causing employment to fall from L* to L1*. There is a trade off between wages and unemployment; in order for wages to rise, employment must fall. The graph is now at point Z, where MCL1 is equal to MRPL. There are ways in which it is possible to stay at the employment level of L* and also the wage rate of W1; for example there must be a shift in the MRPL upwards, meaning in reality that the marginal productivity of labour must increase, this means that in order for the increase in wages to be desirable to an employer, the employees must improve their productivity. This could...
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