Labor Union
What is Labor Union?
A labor union is an organized group of workers that bargains collectively with employers over wages, benefits, and conditions.
By negotiating as a group, unions gain bargaining power individual workers lack and can raise wages above the competitive level. This can reduce employment in unionized firms and is a form of market power in labor markets.
Labor Union: a worked example
Take a competitive labor market with demand Qd = 860 - 20W and supply Qs = 140 + 20W, where W is the hourly wage. Setting them equal gives 860 - 20W = 140 + 20W, so 720 = 40W and W = $18, with 500 workers hired. A union then negotiates $24 an hour. At that wage employers want Qd = 860 - 480 = 380 workers while Qs = 140 + 480 = 620 want jobs, a surplus of 240. Employment falls by 500 - 380 = 120 workers. The hourly wage bill for those still employed rises from 500 x $18 = $9,000 to 380 x $24 = $9,120, because labor demand is inelastic over this stretch. Members who keep their jobs earn $6 more per hour while 120 displaced workers get nothing, which is the insider and outsider split sitting behind every union wage effect.
The mistake students make with labor union
Students memorize that unions always cut employment, then apply that rule to a monopsony diagram where the conclusion reverses. A single dominant employer already hires fewer workers at a lower wage than a competitive market would, because marginal factor cost rises above the labor supply curve. A union wage floor set between the monopsony wage and the competitive wage makes marginal factor cost horizontal at that floor, so the employer hires more workers, not fewer. Check the market structure before predicting the employment effect. Above a competitive wage a union creates a labor surplus; above a monopsony wage it can lift pay and employment together.
Labor Union questions
How does a labor union raise wages above the competitive level?
A union bargains as the single seller of labor to the firm, so individual workers stop underbidding one another. Backed by a credible threat to strike and halt production, the union can push the negotiated wage above what any one worker could obtain alone. Unions also restrict labor supply through apprenticeship rules and licensing, and they support policies that raise demand for what members produce, both of which lift the wage.
Do labor unions cause unemployment?
In a competitive labor market a negotiated wage above equilibrium raises the quantity of labor supplied and lowers the quantity demanded, so a surplus of workers opens in that occupation. Some of those workers queue for the covered jobs and others move into nonunion sectors, where the added supply pushes wages down. The usual measured result is a wage gap between union and nonunion work plus fewer jobs in the covered sector, rather than a permanent rise in economy-wide unemployment.
What is the difference between a labor union and a monopsony?
A labor union holds market power on the selling side of the labor market, acting as one supplier of workers and pushing the wage up. A monopsony holds market power on the buying side, a lone major employer that hires fewer workers and pays less than a competitive market would. When both appear in the same market the setup is called bilateral monopoly, and the wage lands between the two outcomes depending on bargaining strength.
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