Trade unions | IGCSE Class 10 Economics Notes

This note covers what a trade union is, how it engages in collective bargaining over pay and conditions, its role in protecting employment and influencing government policy, the factors that affect a union's bargaining strength, and the advantages and disadvantages of trade union activity for workers, firms and the government.

What is a trade union?

A trade union is an organisation of workers formed to protect and promote the interests of its members, mainly through negotiating with employers on pay and working conditions.

Workers join a union voluntarily and pay a membership subscription in return for representation. A union may represent workers in a single firm, a single industry or a whole occupation.

Definition: Trade union. An organisation of employees that negotiates with employers, on behalf of its members, over wages, hours of work and conditions of employment, and that may also take industrial action to support its demands.

Unions exist because an individual worker usually has very little bargaining power when negotiating alone with a large employer.

By combining the union membership of many workers into a single negotiating body, a union can speak with one voice and bargain on more equal terms with management.

Different types of union exist: a craft union represents workers with a particular skill across many firms, an industrial union represents all grades of worker in one industry, a general union represents workers across many industries and occupations, and a white-collar union represents office, professional or managerial staff rather than manual workers.

A worker is free to decide whether the benefits of membership, such as representation and a stronger bargaining position, outweigh the cost of the subscription; this is why union membership is described as voluntary rather than compulsory.

How do trade unions engage in collective bargaining?

Collective bargaining is the process in which union representatives negotiate with employers, or with employers' associations, on behalf of all their members together rather than each worker negotiating individually.

Definition: Collective bargaining. Negotiation between a trade union, acting on behalf of its members as a group, and an employer or group of employers, over pay, hours and conditions of work.

Collective bargaining typically covers three broad areas. If negotiation over these fails to reach agreement, the dispute may instead be referred to a third party:

1. Wage negotiation: the union presses for a rate of pay, pay increase or bonus structure that reflects the cost of living, the firm's profitability and comparable pay in other firms.
2. Working hours: the union may negotiate the length of the working week, overtime rates, shift patterns, holiday entitlement and notice periods.
3. Working conditions: the union may press for improvements to health and safety, workplace facilities, job security and grievance procedures.
4. If negotiation fails to reach agreement, the union and employer may refer the dispute to a third party for arbitration, where an independent person recommends a settlement, or the union may call for a vote on industrial action.

If employers refuse to improve an offer, a union may organise strike action, in which members stop working, or other forms of industrial action such as working strictly to the terms of a contract ("work-to-rule") or refusing overtime.

During a strike, members may also take part in picketing, where union members stand outside the workplace to discourage other workers or customers from entering, and to publicise the dispute.

A strike imposes a cost on both sides: workers lose pay for the days not worked and the firm loses output and sales, so both employer and union have an incentive to settle through negotiation wherever possible.

How do trade unions protect employment and influence government policy?

Besides negotiating pay, a central role of a trade union is protecting employment. This means the union tries to prevent members being dismissed unfairly, to negotiate on redundancy terms if a firm must reduce its workforce, and to represent individual members in disciplinary or grievance cases.

A union official may accompany a member to a meeting with management and argue the member's case, which gives an individual worker a stronger position than negotiating alone.

Trade unions also try to influence government policy on matters that affect employment and working life, even though this goes beyond bargaining with a single employer.

A union, or a federation of unions, may lobby government over issues such as the level of the minimum wage, employment protection law, health and safety regulation, hours of work legislation and welfare benefits for the unemployed.

Unions may do this by meeting ministers, submitting evidence to government reviews, campaigning publicly or supporting political parties that favour their aims. In this way a union's influence can extend from a single workplace to national economic policy.

Some unions also engage in wider activities that support members, such as providing legal advice, training, and representation at employment tribunals, which further protects a member's position in employment.

What factors influence the strength of a trade union?

A union's bargaining strength, meaning its ability to win concessions from an employer, depends on several factors working together rather than on any single feature of the union.

• Union membership: a union with a high proportion of workers in a firm or industry as members has more bargaining power, because the employer cannot easily replace striking workers. The proportion of all employees who belong to a union is called trade union density.
• Importance of the workers: unions representing workers who are highly skilled, or whose labour is essential to production (for example, workers who cannot easily be replaced at short notice), tend to have more power than unions representing easily replaceable, unskilled labour.
• Financial strength of the union: a union with large reserve funds can support striking members with strike pay for longer, which strengthens its negotiating position.
• Profitability and size of the employer: a profitable firm, or one facing high demand for its product, is more able to afford a pay rise and more likely to want to avoid a costly strike, so union demands are more likely to succeed.
• State of the labour market: when unemployment is low and firms find it hard to recruit, a union's bargaining position is strong, because the employer has few alternative workers to call on; when unemployment is high, the union's position is weaker.
• Legal framework: government laws on the right to strike, picketing and union recognition can limit or support a union's ability to take effective action.

These factors usually combine rather than acting alone. A union with high membership but weak finances, for example, may struggle to sustain a long strike even though the employer would find it difficult to carry on production without the members concerned, so a strong position on one factor does not guarantee a strong outcome overall.

The strength of a union also tends to vary with the type of market the employer operates in. A firm that is a monopsony employer, meaning the only significant buyer of a particular type of labour in a local market, is often in a stronger position when bargaining with weak or fragmented unions, because workers usually have no alternative employer to turn to; this is one reason why unions representing workers for such employers often try to raise their membership as a priority.

Conversely, when many firms compete for the same skilled workers, each firm has a stronger incentive to settle quickly with a union rather than risk losing staff to a competitor, which tends to raise the union's bargaining strength even without a change in membership numbers.

What are the advantages of trade union activity?

From the viewpoint of workers

Trade unions can win higher wages, shorter hours and better conditions than an individual worker negotiating alone could achieve, because collective bargaining gives workers greater power relative to the employer.

A union can also provide job security by challenging unfair dismissal, and can offer a worker representation, advice and support that an individual would otherwise lack.

Because the union negotiates on behalf of all members, an individual worker does not need to risk their own job by bargaining alone.

From the viewpoint of firms

A firm can benefit from dealing with a single union rather than negotiating separately with every employee, which saves time and keeps labour relations more orderly.

A recognised union can also act as a channel of communication between management and the workforce, which may improve morale, reduce misunderstandings and lower staff turnover, since grievances are resolved through agreed procedures rather than through disputes with individuals.

From the viewpoint of government

Government can benefit when unions help to maintain orderly industrial relations, reducing the number of days lost to strikes across the economy.

Because unions represent large numbers of workers, government can also consult unions as a single body when forming policy on employment and working conditions, which can make policy more acceptable to the workforce as a whole.

What are the limitations of trade union activity?

From the viewpoint of workers

Union membership requires paying a subscription, and some workers may feel the union does not always represent their individual interests, particularly if different groups of members want different outcomes.

If a union calls a strike, members lose pay for the period on strike, and a prolonged dispute can cause financial hardship.

From the viewpoint of firms

If a union negotiates a wage above the rate that balances the supply of and demand for that type of labour, firms may respond by employing fewer workers, which can raise unemployment among that group.

Strike action and the threat of strike action raise costs for the firm through lost output, reduced sales and damage to its reputation with customers.

Negotiations can also be time-consuming and can restrict a firm's flexibility to change working practices quickly.

From the viewpoint of government and the wider economy

Strikes in key industries, such as transport or energy, can disrupt the whole economy, not just the firms directly involved. If union-negotiated wage increases are not matched by increases in productivity, firms may raise prices, contributing to cost-push inflation.

Persistently high wages negotiated by strong unions, particularly where a single employer (a monopsony employer) might otherwise have kept wages artificially low, can be justified, but if wages rise faster than productivity across many industries, this can also reduce a country's international competitiveness.

Going beyond the syllabus

In many countries, trade union density has generally fallen in recent decades as employment has shifted from large manufacturing workplaces, where unions were traditionally strong, towards smaller firms and service-sector jobs.

Governments in different countries also vary in how much they restrict or support the right to strike and to picket, which affects how much practical bargaining power a union can use even where membership is high.

Individual unions sometimes join together into a larger federation of unions, which can represent workers from many different industries when dealing with national government. A federation may coordinate policy among its member unions, pool resources to support a dispute in any one industry, and give workers a stronger collective voice on matters such as employment law than any single union could achieve alone.

Where a single employer dominates the demand for a particular type of labour, economists describe this employer as a monopsony employer. In this situation a trade union negotiating on behalf of workers can, in principle, raise both the wage rate and the level of employment compared with the outcome under an unorganised labour market, because the employer would otherwise have been able to set wages lower than firms could in a more competitive labour market.

How do trade unions affect wages in theory?

Economists usually analyse a competitive labour market using demand for labour, meaning the number of workers firms wish to employ at each wage rate, and supply of labour, meaning the number of workers willing to work at each wage rate. Where these two curves intersect gives the market, or equilibrium, wage rate and the quantity of labour employed.

When a trade union negotiates successfully for a wage above this equilibrium rate, firms usually wish to employ fewer workers than before, because labour has become more expensive relative to other inputs. The gap between the number of workers willing to work at the higher wage and the smaller number that firms wish to employ represents workers who are willing to work at that wage but cannot find a job, which can show up as higher unemployment in that particular labour market.

This outcome is not automatic, however. If the employer was previously a monopsony employer, a single dominant buyer of labour able to hold the wage below the competitive rate, then a union negotiating on behalf of workers can, in principle, raise both the wage rate and the level of employment at the same time, because the union removes the employer's ability to depress wages below what a more competitive labour market would produce.

Whether a negotiated pay rise leads to job losses, no change in employment, or even more jobs therefore depends on the structure of the particular labour market, on whether the employer had previously been paying below a competitive rate, and on whether any pay rise is matched by an increase in worker productivity, since a rise in output per worker can allow a firm to pay higher wages without raising its unit costs or cutting its workforce.

Why do trade unions matter to firms, workers and government together?

The role of a trade union cannot be judged from the viewpoint of workers alone, because the same piece of bargaining can affect a firm's costs, its customers' prices, and the government's wider economic objectives at the same time.

For workers, the central purpose of a union is to use collective bargaining to achieve outcomes, on pay, hours and working conditions, that an individual acting alone would usually be unable to secure. This is why joining a union remains attractive to many employees even though membership requires paying a subscription.

For firms, a recognised trade union can simplify what would otherwise be hundreds of separate conversations with individual staff into one structured negotiation, which can reduce the time managers spend on pay and grievance issues and can make the outcome of any dispute more predictable, provided the relationship between management and the union remains cooperative.

For government, the activities of trade unions matter for several of its economic objectives at once. A well-functioning system of collective bargaining can help to keep inflation and unemployment low by resolving pay disputes without strikes, while a poorly functioning one, in which disputes regularly lead to strike action in important industries, can damage output, exports and the government's broader macroeconomic targets.

Because of this, trade unions sit at the intersection of microeconomic decisions taken by individual workers and firms and macroeconomic outcomes that affect the whole economy, which is why their activity is normally examined from all three viewpoints, workers, firms and government, rather than from any one alone.

Glossary

• Trade union — an organisation of workers that negotiates with employers on pay, hours and conditions on behalf of its members.
• Collective bargaining — negotiation between a union, representing a group of workers, and an employer over wages, hours and conditions.
• Union membership — the number or proportion of workers who belong to a trade union.
• Trade union density — the proportion of all employees in an economy or industry who are trade union members.
• Craft union — a union representing workers with a particular skill, across different firms and industries.
• Industrial union — a union representing all grades of worker employed within a single industry.
• General union — a union representing workers across many different industries and occupations.
• White-collar union — a union representing office, professional or managerial employees rather than manual workers.
• Strike action — a stoppage of work by employees, organised by a union, usually to press for a pay or conditions claim.
• Picketing — union members standing outside a workplace during a dispute to discourage entry and publicise their case.
• Arbitration — settlement of a dispute between a union and an employer by an independent third party.
• Monopsony employer — a single, dominant buyer of labour in a particular market, able to influence the wage rate it pays.
• Working conditions — the non-pay terms of a job, including safety, hours, workplace facilities and job security.
• Trade dispute — a disagreement between a union and an employer, usually over pay or conditions, that may lead to industrial action.
• Wage negotiation — the process of bargaining between a union and an employer over the level of pay.

Common errors and misconceptions

• Misconception: A trade union is a political party. Correct: A trade union is an organisation of employees formed to negotiate pay and conditions; it may try to influence government policy, but it is not itself a political party.
• Misconception: Strike action always wins workers a better deal. Correct: Strikes impose costs on workers through lost pay, and a strike may fail to win concessions if the firm can manage without the workers or if the union's financial reserves run out.
• Misconception: Unions can only raise wages, not working conditions or hours. Correct: Collective bargaining covers wages, working hours and working conditions together, not pay alone.
• Misconception: A strong union is always good for firms. Correct: Firms can benefit from improved communication, but a strong union can also raise labour costs and reduce flexibility.
• Misconception: Union membership is compulsory for all workers in an industry. Correct: Joining a trade union is voluntary; workers choose whether to pay a subscription and become a member.
• Misconception: Union bargaining power depends only on the number of members. Correct: Bargaining power also depends on how essential the workers are, the union's financial reserves, the state of the labour market and the law.
• Misconception: Trade unions always cause unemployment. Correct: Unemployment can result if a negotiated wage is pushed above the rate that balances labour supply and demand, but this is not an automatic or certain outcome of every negotiation.

Exam-style questions with model answers

Q1. Define 'trade union'. [2 marks]

1. A trade union is an organisation of workers that negotiates with employers, on behalf of its members, over pay, hours of work and conditions of employment.

Q2. Identify two topics, other than wages, typically covered by collective bargaining. [2 marks]

1. Working hours, such as the length of the working week, overtime arrangements or shift patterns.
2. Working conditions, such as health and safety, workplace facilities or job security.

Q3. Explain two reasons why workers may choose to join a trade union. [4 marks]

1. An individual worker usually has little bargaining power negotiating alone with a large employer; by joining together through a union, workers gain collective bargaining power, so they are more likely to win higher wages or better conditions than they could individually.
2. Union membership gives a worker access to representation and advice if they face a disciplinary matter or unfair dismissal; a union official can accompany and support the member, which protects the worker's position in a way that acting alone could not achieve.

Q4. Explain two ways in which a trade union tries to protect the employment of its members. [4 marks]

1. A union may negotiate with an employer over the terms of any redundancies, such as the order in which jobs are cut or the redundancy payments offered, to limit job losses among its members.
2. A union may represent an individual member at a disciplinary hearing or in a case of unfair dismissal, arguing the member's case to management so the worker is less likely to lose their job without good reason.

Q5. Analyse two factors that influence the strength of a trade union when negotiating with an employer. [6 marks]

1. Union membership: a union with a high proportion of a firm's workers as members has more bargaining power, because the employer would struggle to replace a large number of striking workers, whereas a union with low membership can be more easily ignored.
2. The state of the labour market: when unemployment is low and the firm finds it hard to recruit replacement staff, the union is in a strong bargaining position, because the employer has little alternative but to agree to demands; when unemployment is high, the employer can more easily find other workers, which weakens the union's position.
3. The financial strength of the union: a union with large reserve funds can continue to pay strike pay to members for longer, allowing it to sustain pressure on the employer, whereas a union with weak finances may be forced to settle on worse terms.

Q6. Analyse the advantages and disadvantages of trade union activity for a firm. [6 marks]

1. An advantage is that negotiating with a single trade union, rather than separately with every employee, saves the firm time and keeps pay negotiations orderly, which can also improve communication between management and the workforce and reduce staff turnover.
2. A disadvantage is that a strong union may negotiate a wage above the rate that balances the supply of and demand for that labour, raising the firm's costs and possibly causing it to employ fewer workers.
3. A further disadvantage is that strike action, or even the threat of it, can disrupt production, reduce sales and damage the firm's reputation with customers, and the resulting loss of output is a direct cost to the firm.

Q7. Discuss whether or not trade unions benefit an economy as a whole. [8 marks]

1. Unions can give workers a fairer share of the income a firm generates, since without collective bargaining a dominant employer might otherwise keep wages low; this can raise living standards and support spending.
2. Unions can improve industrial relations by providing an agreed channel for resolving grievances, which can reduce individual disputes and keep production running smoothly.
3. However, if negotiated wage increases are not matched by rises in productivity, firms may raise prices, contributing to cost-push inflation, and may become less competitive against firms in other countries.
4. Strikes in key industries, such as transport or energy, can disrupt output and services well beyond the firms directly involved, imposing a cost on the wider economy.
5. If wages rise above the level that balances labour supply and demand, some firms may employ fewer workers, raising unemployment in the affected industry.
6. Overall, the benefit to the economy depends on whether wage gains are matched by productivity, and on how often disputes are resolved by negotiation rather than damaging strikes.

Q8. Discuss whether or not a government should restrict the right of trade unions to take strike action. [8 marks]

1. Restricting strikes could protect the public from disruption to essential services, such as transport, healthcare or energy supply, where a strike can affect people far beyond the firm and union involved.
2. Restricting strikes could also reduce the output lost across the economy, helping to protect growth and competitiveness if wage settlements are kept closer to productivity growth.
3. However, restricting the right to strike weakens a union's main source of bargaining power, since the threat of a strike often persuades an employer to improve an offer; without it, workers may have little protection against low wages or poor conditions.
4. Removing the right to strike could damage trust between workers and management, since employees may feel they have no effective means of being heard, lowering morale even without an actual stoppage.
5. A balanced approach, such as requiring advance notice of a strike or a ballot of members, allows essential services some protection while preserving a genuine right to strike, which is likely fairer than removing the right altogether.

Key takeaways

• A trade union is an organisation of workers that negotiates pay, hours and conditions with employers on behalf of its members.
• Collective bargaining gives workers more negotiating power than they would have acting individually against an employer.
• Trade unions protect employment by negotiating on redundancy terms and representing members in disciplinary cases.
• Unions may also try to influence government policy on issues such as the minimum wage and employment law.
• A union's bargaining strength depends on its membership, the importance of its workers, its financial reserves, and the state of the labour market.
• Advantages of unions include higher wages, better conditions, and more orderly communication between workers and management.
• Disadvantages include subscription costs, lost pay during strikes, higher labour costs for firms, and possible unemployment if wages rise above the market rate.
• Strikes in essential industries can disrupt the wider economy, not only the firm directly in dispute.

Test yourself

What is collective bargaining?

Negotiation between a trade union, representing a group of workers, and an employer over wages, hours of work and conditions of employment.

Name three topics covered by collective bargaining.

Wages, working hours and working conditions.

What is picketing?

Union members standing outside a workplace during a dispute, usually a strike, to discourage people from entering and to publicise their case.

Give one factor that strengthens a union's bargaining power.

High union membership in a firm, so the employer cannot easily replace striking workers; or low unemployment, which makes replacement workers hard to find.

Give one way a union can protect employment besides negotiating pay.

Representing a member in a case of unfair dismissal or negotiating fairer terms during redundancies.

Explain one disadvantage of trade union activity for a firm.

If a union negotiates wages above the rate balancing labour supply and demand, the firm's costs rise and it may employ fewer workers.

Explain one disadvantage of trade union activity for a worker.

Members must pay a subscription, and during a strike they lose pay for the days not worked.

Why might a strike in an essential industry concern the government?

It can disrupt services or production across the whole economy, not just the firm and workers directly in dispute.