Trade unions — common mistakes

When analysing the impact of a minimum wage or a trade union, always explicitly state the market structure you are assuming (perfect competition vs. monopsony). Use separate, clearly labelled diagrams to illustrate the different outcomes in each case to secure the highest marks.

Not necessarily. While the model of a perfectly competitive market predicts it will, this is a simplification. In a market with monopsony power, where a dominant employer can suppress wages, a well-judged minimum wage can actually increase employment by moving the outcome closer to the competitive equilibrium. Real-world evidence is mixed and depends on the industry and the level at which the wage is set.

Their impact is debatable. By counteracting monopsony power, they can correct market failure and improve efficiency. However, if they use their monopoly power to push wages significantly above the competitive equilibrium level, it can lead to firms reducing employment to cut costs, causing unemployment and a loss of output. The benefits may go to 'insiders' (members who keep their jobs) at the expense of 'outsiders' (the unemployed).

While a pure monopsony with only one buyer of labour is rare, many firms possess a degree of monopsony power. This is common in towns dominated by one large employer (e.g., a university or factory) or in specific professions where there is one main employer, such as the National Health Service (NHS) for specialist nurses in the UK. Any situation where workers have limited alternative employers gives the firm some wage-setting power.