Trade Unions with a Monopsony Employer
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In this presentation we consider the theory of wage-setting with a monopsony employer and the possible impact that a trade union might have on wages and employment. We also look at efficiency wage theory and mutual gains from pay bargaining between stakeholders.
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Trade Unions with a Monopsony Employer
- 1. Trade Unions in a Monopsony A Level Microeconomics
- 2. Monopsony power and trade unions • Monopsony is employer-led buying power in the labour market • This market power may lead to a monopsony employer paying lower wages than if the labour market was competitive • Theory can show that a single-firm monopsony may choose to offer a wage (in equilibrium) lower than the marginal revenue product of those employed • This can lead to worker exploitation and the risk of an increase in working poverty • Working poverty is when a family with people in work remains below the official relative poverty line (usually 60% of median income)
- 3. Monopsony analysis diagramWage Rate Employment Labour Supply (= ACL) W1 E1 • Profit maximising employment level is where MCL=MRPL i.e. E2 number of people are employed • Their marginal revenue product is valued at W2 Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2
- 4. Monopsony analysis diagram Wage Rate Employment Labour Supply (= ACL) W1 E1 • Profit maximising employment level is where MCL=MRPL i.e. E2 number of people are employed • Their marginal revenue product is valued at W2 • Monopsony power of the employer allows them to pay a wage rate W3 Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2 W3
- 5. Wages lost from under-payment by employer Monopsony analysis diagram Wage Rate Employment Labour Supply (= ACL) W1 E1 • Profit maximising employment level is where MCL=MRPL i.e. E2 number of people are employed • Their marginal revenue product is valued at W2 • Monopsony power of the employer allows them to pay a wage rate W3 Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2 W3
- 6. Wages lost from under-payment by employer Monopsony analysis diagram Wage Rate Employment Labour Supply (= ACL) W1 E1 Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2 W3 • Monopsony employer can use their buying power to pay a wage lower than the value of the marginal revenue product of workers employed at E2 • Monopsony power can lead to exploitation of employed workers
- 7. Trade Unions Trade Unions are organizations that act collectively on behalf of their members for improved pay and working conditions. They can use their collective bargaining power to negotiate with employers. Key functions: 1. Pay bargaining 2. Protecting pension rights 3. Employment rights / unfair dismissal 4. Working conditions including health and safety at work 5. Lobbying for improved minimum wages and training funding
- 8. Union membership in the UK • Around 6.2 million employees in the UK were trade union members in 2017 • Current union membership levels are well below the peak of over 13 million in 1979 • The proportion of employees who were trade union members fell to 23.2% from 35% in 1995 • The proportion of trade union members amongst private sector employees was to 13.5%. • Trade union density in the public sector was 51.8% in 2017.
- 11. Monopsony analysis diagram Wage Rate Employment Labour Supply (= ACL) Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2 W3 • How might a trade union with significant bargaining power impact on a monopsony employer?
- 12. Monopsony analysis diagram Wage Rate Employment Labour Supply (= ACL) Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2 W3 • How might a trade union with significant bargaining power impact on a monopsony employer? • Current wage is W3 and E2 people are employed
- 13. Monopsony analysis diagram Wage Rate Employment Labour Supply (= ACL) Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2 W3 • How might a trade union with significant bargaining power impact on a monopsony employer? • Current wage is W3 and E2 people are employed • The trade union may use their strike threat power to bid the wage up to a minimum of W4 W4 W4 is a trade union negotiated wage rate
- 14. Monopsony analysis diagram Wage Rate Employment Labour Supply (= ACL) Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2 W3 • How might a trade union with significant bargaining power impact on a monopsony employer? • Current wage is W3 and E2 people are employed • The trade union may use their strike threat power to bid the wage up to a minimum of W4 • If this becomes the “going wage rate” then it is also the marginal cost of employing extra workers W4 W4 is a trade union negotiated wage rate
- 15. Monopsony analysis diagram Wage Rate Employment Labour Supply (= ACL) Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2 W3 • How might a trade union with significant bargaining power impact on a monopsony employer? • Current wage is W3 and E2 people are employed • The trade union may use their strike threat power to bid the wage up to a minimum of W4 • If this becomes the “going wage rate” then it is also the marginal cost of employing extra workers • In which case, the profit maximising level of employment rises to E4 W4 W4 is a trade union negotiated wage rate E4
- 16. Monopsony analysis diagram Wage Rate Employment Labour Supply (= ACL) Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2 W3 • How might a trade union with significant bargaining power impact on a monopsony employer? • Current wage is W3 and E2 people are employed • The trade union may use their strike threat power to bid the wage up to a minimum of W4 • If this becomes the “going wage rate” then it is also the marginal cost of employing extra workers • In which case, the profit maximising level of employment rises to E4 • In this monopsony example, trade unions may achieve higher pay and employment W4 W4 is a trade union negotiated wage rate E4
- 17. Evaluating monopsony power & trade unions In theory a monopsony may pay low wages but in practice they don't have to and may benefit by raising wages Challenging assumptions – we are assuming that labour productivity is unaffected by wages The bigger picture – are “superstar firms” getting too big? A case for more rigorous competition policy?
- 18. Monopsony analysis diagram Wage Rate Employment Labour Supply (= ACL) Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2 W3 • Efficiency wage theory • The idea of the efficiency wage theory is that increasing wages can lead to increased labour productivity. • This can lead to an outward shift of labour demand (MRPL) W4 W4 is a trade union negotiated wage rate E4
- 19. Monopsony analysis diagram Wage Rate Employment Labour Supply (= ACL) Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2 W3 • Efficiency wage theory • The idea of the efficiency wage theory is that increasing wages can lead to increased labour productivity. • This can lead to an outward shift of labour demand (MRPL) • Leading to higher wages and employment W4 W4 is a trade union negotiated wage rate E4 LD2 E5 W5
- 20. Monopsony analysis diagram Wage Rate Employment Labour Supply (= ACL) Labour Demand = MRPL Marginal cost of labour (MCL) E2 W2 W3 • Efficiency wage theory • The idea of the efficiency wage theory is that increasing wages can lead to increased labour productivity. • This can lead to an outward shift of labour demand (MRPL) • Leading to higher wages and employment W4 W4 is a trade union negotiated wage rate E4 LD2 E5 W5 Trade unions may agree with an employer a wage-productivity arrangement, where pay rises are linked to targeted improvement in productivity e.g. measured by the value of output per person. There might be mutual gains from this agreement – an example of co-operative game theory
- 21. Trade Unions in a Monopsony A Level Microeconomics
Editor's Notes
- Aldi: Aldi’s new rate is 10p high than the Living Wage Foundation’s recommended ‘real living wage’ of £9.00 per hour outside the capital while matching the £10.55 suggested for London. The idea of the efficiency wage theory is that increasing wages can lead to increased labour productivity. Therefore if firms increase wages – some or all of the higher wage costs will be recouped through increased staff retention and higher labour productivity.