Labour Markets

Question 1

Imagine you have a diagram for a trade union being introduced to a previously competitive market (draw it hun). Explain the theory for why wages may rise and demand may fall.

Answer 1

The initial labour market equilibrium is at Q1W1. A trade union may bid up wages above this equilibrium to WTU. This means that wages for workers have risen. But, demand for labour may contract. This is because higher wages costs for firms means that their production costs are higher. To limit this rise, firms may choose to demand less labour and substitute for capital instead to produce output (to preserve profits). This is shown by the quantity of labour demanded falling from q1 to q2, hence employment has fallen.

Question 2

What legislation was introduced in 1980 making trade unions less powerful?

Answer 2

Legislation was introduced in the late 1980s making ‘closed shop’ trade unions illegal, requiring secret ballots and a 75% majority for a union to strike