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Workers » Trade Unions and the National Minimum Wage

What you'll learn this session

Study time: 30 minutes

Cambridge spec: 3.3.2

What trade unions are and what gives them more or less bargaining power
How unions may affect wages and jobs
What a national minimum wage (NMW) is and how to draw its diagram
The arguments for and against a NMW

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Trade unions and collective bargaining

One worker asking for a pay rise has very little power. The boss can simply say no. But if all the workers ask together, the firm has a much harder problem. That is the idea behind a trade union.

Key terms:

Trade union: an organisation of workers that protects and improves its members' pay and working conditions.
Collective bargaining: when a union negotiates with employers on behalf of all its members, instead of each worker negotiating alone.
Bargaining power: how strong a group is when it negotiates, and how likely it is to get what it asks for.

Unions can ask for higher wages, shorter hours, safer conditions and more job security. If talks fail, a union may threaten action, such as a strike (workers refuse to work) or working strictly to the rules.

What gives a union more or less bargaining power?

💪 More power

Many workers are members, so a strike would stop production.
The workers have rare skills, so they are hard to replace.
The firm is making high profits and can afford to pay more.
Demand for the firm's product is high and it needs to keep producing.
It is hard for the firm to swap workers for machines.

😐 Less power

Few workers are members.
Workers are unskilled and easy to replace.
There is high unemployment, so many people would take the jobs.
The firm is making a loss or demand for its product is falling.
Laws limit what unions are allowed to do.

Possible effects of unions on wages and jobs

A strong union may win a wage above the equilibrium wage for its members. That helps the workers who keep their jobs. But there can be costs:

A higher wage raises the firm's costs. The firm may hire fewer workers, so some jobs may be lost.
The firm may raise its prices, or its profits may fall.
Strikes and disputes can cut production and sales.

Unions can also have good effects. Better pay and conditions may make workers happier and more productive, and unions give workers a voice. So the effect on jobs depends on how strong the union is and how the firm responds.

Government policy and the national minimum wage

Governments can also affect wages. They may pass laws on working conditions, change taxes on earnings, or train workers so that they earn more. One policy is the national minimum wage.

Key terms:

National minimum wage (NMW): the lowest wage per hour that employers are legally allowed to pay.

Remember from the lesson Maximum and Minimum Prices that a minimum price is set above the equilibrium. A NMW is a minimum price for labour.

The NMW diagram

Here is how to draw it in the exam:

Draw the axes. Put Wage on the vertical axis and Quantity of labour (number of workers) on the horizontal axis.
Draw a downward-sloping demand curve and label it D. Draw an upward-sloping supply curve and label it S.
Mark where they cross. This is the equilibrium wage, W_e, and the equilibrium quantity of labour, Q_e.
Draw a horizontal line above W_e and label it NMW.
Read across at the NMW. The demand curve gives Q_d (the workers firms want to hire), which is less than Q_e. The supply curve gives Q_s (the people who want to work), which is more than Q_e.
The gap between Q_d and Q_s is the surplus of labour, which means unemployment.

Worked example

In a made-up country, Kerland, the equilibrium wage for cleaners is $6 an hour and 800 cleaners are employed. The government sets a NMW of $8. At $8, firms want only 700 cleaners, but 1,000 people want to work. The surplus of labour is 1,000 - 700 = 300 people. Some cleaners gain a higher wage. But 100 fewer cleaners are employed than before.

Arguments for and against a NMW

✅ For

Low-paid workers earn more.
It stops employers paying very low wages.
Work becomes more rewarding compared with relying on state benefits.
Better-paid workers may be more motivated and productive.

❌ Against

Firms' costs rise, so some may hire fewer workers. This can cause unemployment.
Firms may raise prices, which hurts consumers.
Young or unskilled workers may find it harder to get a first job.
If set too high, small firms may close.

The effect depends on how far the NMW is above the equilibrium wage. A NMW set only slightly above it causes little unemployment. A NMW set far above it can cause a lot.

Common mistakes

Drawing the NMW line below the equilibrium wage. It would have no effect, because everyone is already paid more. Also, forgetting that a NMW helps the workers who keep their jobs while it may harm those who lose theirs. Always mention both sides.

Exam-style question

In the country of Rendia, a strong union represents most bus drivers. The government also sets a national minimum wage for all workers.

(a) Define collective bargaining. [2 marks]

(b) Explain one reason why a union may have strong bargaining power. [3 marks]

Model answer

(a) Collective bargaining is when a union negotiates with employers on behalf of its members (1) about pay and conditions, instead of each worker bargaining alone (1).

(b) A union has strong bargaining power when many workers are members (1). If they strike, the firm cannot run its buses (1), so it loses sales and is more likely to agree to higher pay (1).

(c) A NMW above the equilibrium wage raises the wage for workers (1). At the higher wage, firms want to hire fewer workers (1) but more people want to work (1). This creates a surplus of labour, so unemployment rises (1).

Exam tip

For part (c), say that the NMW must be above the equilibrium wage, then show that the quantity of labour demanded falls (Q_d) while the quantity supplied rises (Q_s). The gap between them is the surplus.

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