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