How do trade unions affect wages and employment

• →A trade union is an organisation of workers that collectively negotiates (collective bargaining) with employers over pay and conditions, aiming to secure a wage above the market-clearing level.
• →In a competitive labour market, the equilibrium wage is set where labour supply equals labour demand. When a trade union successfully bargains for a higher wage, known as the union wage, a wage floor is introduced above equilibrium.
• →This means that the cost of hiring each worker rises for the firm.
• →As a result, profit-maximising employers respond by reducing their quantity of labour demanded, moving back along the marginal revenue product (MRP) curve.
• →Therefore, while unionised workers who retain their jobs benefit from higher wages, overall employment in that labour market falls, creating a trade-off between wage gains and job losses.
• →For example, if a union in the manufacturing sector secures a wage of £18 per hour against a market equilibrium of £14, firms may substitute capital for labour or reduce headcount to contain costs.
• →The size of this employment effect depends on the wage elasticity of demand for labour; the more inelastic the demand, the smaller the fall in employment for any given wage increase.

• →Collective bargaining and wage floors: Trade unions act as a monopoly supplier of labour, allowing them to set a minimum wage above the competitive equilibrium. Understanding why this shifts the effective labour supply curve to become horizontal at the union wage is essential.
• →Marginal Revenue Product (MRP): Employers hire workers up to the point where MRP equals the wage rate. When the union wage rises above equilibrium, firms move to a lower point on the MRP curve, reducing the number of workers hired. A confident answer will link the wage increase explicitly to this employer decision-making process.
• →Wage elasticity of demand for labour: The employment loss caused by a union wage increase is smaller when labour demand is inelastic. Inelasticity arises when labour costs are a small proportion of total costs, when labour has few substitutes, or when the product being produced has inelastic demand. Stronger unions tend to organise in sectors where these conditions hold.
• →The trade-off between wages and employment: A union faces a fundamental choice — it can prioritise maximising the wage for members in employment, or it can moderate wage demands to protect more jobs. This is sometimes illustrated as the union choosing a point on the labour demand curve, trading off higher pay against lower employment.
• →Monopsony context: In a labour market where a single employer (monopsonist) already pays a wage below the competitive level, a union can raise wages without reducing employment up to a certain point. This is a key exception and distinguishes the union's effect in competitive versus monopsonistic labour markets.

This question assesses understanding of the mechanisms through which trade unions influence labour market outcomes, as set out in AQA spec point 4.1.6.5 — The Influence of trade unions in determining wages and levels of employment. Specifically, it tests whether students can apply the theory of wage determination to explain how collective bargaining creates a wedge between the union wage and the competitive equilibrium wage, and then trace the consequences for employment levels. Higher-mark responses are expected to demonstrate knowledge of MRP theory, recognise the wage-employment trade-off, and show awareness that the outcome differs depending on whether the labour market is competitive or characterised by monopsony power.

Examined 3 times across AQA since 2017.

The concept has appeared at both the lowest tariff (single-mark multiple choice) and the highest recorded tariff of 9 marks, indicating that examiners have tested it across a wide range of cognitive demands on different papers.