What this lesson teaches
I can explain and draw how labour demand and supply, trade unions and minimum wages set wages.
Syllabus K343, 3.3.2. Wage determination: influences of the demand for labour and the supply of labour; trade unions and their relative bargaining power; government policy, including national minimum wage (NMW); drawing and interpretation of diagrams that illustrate the effects of: changes in demand and supply in the labour market, national minimum wages
Make a guess
A minimum wage is set well above the market wage for cleaners. What happens to the number of cleaners employed?
- It stays the same, because buildings still need cleaning.
- It may fall, as firms hire fewer at that wage.
- It rises, because more people want to be cleaners.
Show the answer
It may fall, as firms hire fewer at that wage.
Cleaners who keep their jobs earn more, but firms want fewer workers at a higher wage, so some may lose work.
Trade unions and minimum wage laws can raise pay above the market wage, but may reduce employment.
A trade union is an organisation of workers that bargains with employers about pay and conditions. Bargaining as a group gives workers more power than bargaining alone.
A union has more bargaining power when most workers are members and are hard to replace. It is also stronger when labour is a small part of the firm's costs, or the firm is making large profits. It has less power when firms can easily switch to machines or rival products take customers.
A national minimum wage (NMW) is the lowest wage firms may legally pay. If it is set above the equilibrium wage, workers who keep their jobs earn more. But firms hire fewer workers, while more people want to work, so unemployment can result.
Singapore does not have a single national minimum wage. Instead its Progressive Wage Model sets minimum pay that rises with skills in sectors such as cleaning and security.
- Trade union
- Workers bargaining together over pay and conditions.
- Strong bargaining power
- High membership, hard-to-replace workers, profitable firm.
- NMW effect
- Higher pay for those employed; possible unemployment if set above equilibrium.
Worked example: When is a union strong?
Compare two unions asking for a 10% pay rise.
- Union A represents pilots. Pilots are hard to replace and highly trained, so the airline is likely to agree: strong bargaining power.
- Union B represents factory packers. The firm can buy packing machines and many people could do the job: weak bargaining power.
- Profit matters too: a firm making large profits can afford higher wages more easily.
Watch out for this
A minimum wage always helps every low-paid worker.
Workers who keep their jobs gain. But if the minimum is above the equilibrium wage, firms may hire fewer people, so some workers lose their jobs or cannot find one.
Check your understanding
When is a trade union least likely to win a pay rise?
- When the firm can easily replace workers with machines
- When the firm is making record profits
- When labour is a small share of the firm's total costs
Show the answer
When the firm can easily replace workers with machines
Right. Easy substitution weakens the union's bargaining power.
Check your understanding
In which case is a trade union likely to have the most bargaining power?
- Rival products can easily take customers
- Labour is a large share of the firm's costs
- Most workers are members and are hard to replace
- The firm can easily switch to using machines instead
Show the answer
Most workers are members and are hard to replace
Right. A firm cannot easily keep going without these workers, so the union can press for more.