Trade Unions and Collective Bargaining

A trade union is an organised association of workers that bargains collectively with employers over pay, hours, conditions and job security. The previous four lessons built the labour market from the demand side (Lesson 1), the supply side (Lesson 2), the competitive equilibrium (Lesson 3) and the monopsony case (Lesson 4). This lesson introduces the second great source of market power in labour markets — power on the workers' side of the bargain — and it produces the single most important and most heavily examined result in the whole module: a union's effect on employment is not fixed; it depends entirely on the market structure it operates in. In a competitive market a union that pushes the wage above equilibrium causes a wage/employment trade-off — higher pay, fewer jobs. But in a monopsony market the very same union action can raise both the wage and employment, because the monopsonist was already restricting jobs below the efficient level. Mastering this "it depends on the market structure" result — and being able to draw both diagrams — is the difference between a mid-band and a top-band answer on this topic. By the end you should be able to derive the competitive wage floor, the monopsony correction, and the indeterminate bilateral-monopoly outcome, and evaluate the role of unions in the modern UK economy.

---

Spec Mapping (AQA 7136)

This lesson sits within Section 4.1.6 — The labour market of the AQA A-Level Economics (7136) specification, the microeconomics half of the course (4.1 Individuals, firms, markets and market failure). It builds directly on the competitive model (Lesson 3) and the monopsony model (Lesson 4), and feeds into the minimum-wage analysis (Lesson 6) and the inequality content of 4.1.7.

• Assessment: Trade unions are examined principally on Paper 1 (Markets and market failure) — data response plus a choice of 25-mark essay — and recur synoptically on Paper 3 (Economic principles and issues), the multiple-choice plus case-study paper that links micro to macro (wage-push inflation, real-wage unemployment).
• AO1 (Knowledge): Define a trade union, collective bargaining, the union mark-up, a union wage floor, bilateral monopoly, the closed shop, and the insider–outsider distinction.
• AO2 (Application): Apply union theory to specific UK contexts — the NHS, the railways, the Royal Mail, gig-economy platforms — and to real data such as union density and the 2022–23 strike wave.
• AO3 (Analysis): Use the competitive wage-floor diagram and the monopsony-with-union diagram to show why the employment effect of a union differs between market structures, and build chains of reasoning on the wage/employment trade-off.
• AO4 (Evaluation): Assess the welfare effects of unions, weigh the competitive against the monopsony case, and judge — conditionally and with justification — when unions raise efficiency and when they reduce it.

Exam Tip: The examiner's favourite trade-union question is some version of "do trade unions cause unemployment?" The single best opening move is to refuse the premise of a one-size-fits-all answer: "It depends on the market structure." That sentence frames the entire essay around the competitive-versus-monopsony contrast and signposts a top-band evaluation from the first line.

---

What Is a Trade Union?

Key Definition: A trade union is an association of workers formed to protect and advance the interests of its members through collective bargaining with employers and, where necessary, industrial action.

The economic rationale for unions is that an individual worker bargaining alone against a large employer has very little power — especially where the employer has monopsony power (Lesson 4). By combining, workers turn many weak individual bargains into one strong collective bargain, raising their bargaining power closer to that of the employer. In effect, a union acts as a monopoly supplier of labour: just as a monopolist is the sole seller of a product, a union that organises an entire workforce becomes the sole seller of that labour, and can use that position to negotiate a higher wage than atomistic competition would yield.

Key Definition: Collective bargaining is the process by which a trade union negotiates pay and conditions on behalf of all the workers it represents, rather than each worker negotiating individually.

Types of Trade Unions

Type	Description	Example
Craft union	Represents workers sharing a particular skill or trade	Musicians' Union
Industrial union	Represents all workers in a specific industry regardless of job	Historically the National Union of Mineworkers (NUM)
General union	Represents workers across many industries and occupations	GMB; Unite the Union
White-collar / professional union	Represents professional, technical and office workers	British Medical Association (BMA); National Education Union (NEU)

In practice many modern unions are conglomerate unions formed by mergers. Unite (created from Amicus and the T&GWU in 2007) is among the UK's largest unions, with well over a million members across manufacturing, transport, health, construction and public services. The trend toward large general unions partly reflects the search for economies of scale in bargaining and the decline of the single-industry workplaces that once sustained narrow craft and industrial unions.

---

Trade Union Membership in the UK

Trade union membership and density (the share of the workforce in a union) have fallen sharply from their late-1970s peak:

Year	Union Members (millions, approx.)	Density (% of employees, approx.)
1979	13.2	55%
1990	9.9	38%
2000	7.3	29%
2010	6.5	27%
2023	6.3	22%

Source: official UK trade-union membership statistics (BEIS / DBT series). Figures rounded; treat as indicative.

Why Membership Has Declined

1. Deindustrialisation. The long shift from manufacturing (heavily unionised, large workplaces) to services (lightly unionised, dispersed workplaces) shrank the union heartland. UK manufacturing employment fell from around 7 million in 1979 to under 3 million today.
2. Anti-union legislation. A sequence of laws from 1980 onward restricted union activity — outlawing secondary picketing, making unions liable for unlawful action, requiring pre-strike ballots, and banning the closed shop. The Trade Union Act 2016 added a 50% turnout threshold for strike ballots (and a 40% yes-of-eligible threshold in "important public services").
3. Smaller, dispersed workplaces. Cafés, shops and delivery platforms are far harder to organise than a single large factory or pit.
4. Greater labour-market flexibility. Zero-hours contracts, agency work and self-employment weaken the stable, full-time employment relationship on which unions historically depended.
5. Individualisation and the free-rider problem. Younger workers may prefer to negotiate individually; and because non-members enjoy union-won pay rises without paying subscriptions, there is a rational incentive to free-ride, which erodes membership over time.

Exam Tip: Do not just list the causes of decline — rank them. The structural shift from manufacturing to services is the most important long-run driver; legislation was the decisive short-run trigger in the 1980s. Distinguishing long-run structural change from short-run policy shocks is itself an AO3 analytical move.

---

How Trade Unions Affect Wages and Employment

There are three models you must be able to deploy. The decisive insight is that the employment consequence flips sign between the competitive and monopsony cases.

Model 1 — Restricting Labour Supply

If a union can control entry to an occupation — historically through the closed shop (compulsory union membership), and still through apprenticeship gateways or professional licensing — it shifts the supply curve of labour leftward, from $S_{1}$S1​ to $S_{2}$S2​. With the demand for labour ($MRP_{L}$MRPL​) unchanged, the new intersection sits higher and to the left: the wage rises from $W_{1}$W1​ to $W_{2}$W2​ but employment falls from $L_{1}$L1​ to $L_{2}$L2​. The shrinkage of supply is precisely what generates the higher wage, and the workers who remain inside the occupation enjoy a larger slice of economic rent (Lesson 3), because the artificial scarcity lifts their pay above what their next-best alternative would offer. The closed shop was outlawed in the UK, so the compulsory-membership version is now of mainly historical and comparative interest. But the licensing version persists wherever a profession tightly controls who may practise — and the same logic explains why occupational licensing, even when justified on quality or safety grounds, can have the side effect of raising insiders' wages by restricting supply.

Model 2 — A Union Wage Floor in a Competitive Market (the Trade-Off)

This is the central competitive result. Through collective bargaining the union negotiates a wage floor $W_{u}$Wu​ above the competitive equilibrium $W^{*}$W∗. No worker will supply labour below $W_{u}$Wu​, so the effective supply curve becomes horizontal at $W_{u}$Wu​ up to the point where it rejoins the original upward-sloping supply curve, then follows the original supply.

The consequences:

• The wage rises from $W^{*}$W∗ to $W_{u}$Wu​.
• Employment falls from $L^{*}$L∗ to $L_{d}$Ld​, because the profit-maximising firm moves up its $MRP_{L}$MRPL​ (demand) curve: at the higher wage it hires where $MRP_{L} = W_{u}$MRPL​=Wu​.
• An excess supply of labour opens up: at $W_{u}$Wu​, $L_{s}$Ls​ workers want to work but only $L_{d}$Ld​ are hired. The gap $L_{s} - L_{d}$Ls​−Ld​ is unemployment of those willing to work at the union wage — a micro foundation for real-wage (classical) unemployment.

How large the employment fall is depends on the wage-elasticity of demand for labour (Lesson 1, Marshall's Rules). Where labour demand is inelastic — capital is a poor substitute, product demand is inelastic, labour is a small share of cost — the union can win a large wage rise for a small employment loss, so the trade-off is favourable to the union. Where demand is elastic, the same wage rise destroys many jobs. This is why unions tend to be most effective (and least damaging to employment) precisely where Marshall's Rules make labour demand inelastic.

Model 3 — A Union Facing a Monopsonist: Bilateral Monopoly (the Correction)

Now place the union in a monopsony market (Lesson 4), where the employer was already paying $W_{m}$Wm​ below the competitive wage $W_{c}$Wc​ and restricting employment to $L_{m}$Lm​ (hiring where $MC_{L} = MRP_{L}$MCL​=MRPL​ but paying off the supply curve). A monopoly union now faces a monopsony employer — a bilateral monopoly.

Key Definition: A bilateral monopoly exists when a monopoly supplier of labour (the union) bargains with a monopsony buyer of labour (the employer). The outcome is theoretically indeterminate: the wage settles somewhere between the monopsonist's preferred $W_{m}$Wm​ and the union's maximum demand, and where it settles depends on the relative bargaining power of the two sides.

The decisive mechanism is the same horizontal-supply trick as Model 2 — but here it works in the opposite direction on employment. When the union imposes a floor $W_{u}$Wu​, the firm's effective supply (and hence its $AC_{L}$ACL​) becomes horizontal at $W_{u}$Wu​ up to the original supply curve. Crucially, over that flat segment the marginal cost of labour equals the wage:

$MC_{L} = AC_{L} = W_{u} \quad \text{(over the floored, horizontal segment)}$MCL​=ACL​=Wu​(over the floored, horizontal segment)

The wedge between $MC_{L}$MCL​ and $AC_{L}$ACL​ that drove the monopsonist to restrict employment (Lesson 4) disappears along the floor. The firm now profit-maximises where this flat $MC_{L}$MCL​ meets $MRP_{L}$MRPL​ — which lies at a higher level of employment than the monopsony $L_{m}$Lm​. So provided the union sets the floor in the right zone, both the wage and employment rise toward the competitive outcome.

This is one of the most important results in labour economics: a trade union can correct monopsonistic exploitation, simultaneously raising pay and jobs and reducing the deadweight loss the monopsonist created. It is the mirror image of how a maximum price can raise output in a monopoly product market. It also explains why unions in heavily monopsonistic sectors — the NHS being the paradigm UK case — can credibly argue that higher pay would not cost jobs, because the employer was suppressing both pay and headcount to begin with.