Revise Trade unions for Cambridge 2281 (3.4)

In a perfectly competitive labour market, the equilibrium wage rate is determined by the interaction of the total market demand for and supply of labour. The market demand curve for labour is downward sloping, reflecting the Marginal Revenue Product (MRP) of labour. The market supply curve is upward sloping, as higher wages are needed to attract more workers into the industry. The intersection of these two curves establishes the market wage. For an individual firm within this market, it is a 'wage taker'. It can hire as many workers as it wants at the prevailing market wage, meaning it faces a perfectly elastic (horizontal) supply curve of labour. To maximise profits, the firm will hire workers up to the point where the MRP of the last worker equals their Marginal Cost of Labour (MCL), which in this case is the market wage rate.

A monopsony exists when there is a single dominant buyer of a particular type of labour. Unlike a competitive firm, a monopsonist faces the entire upward-sloping market supply curve. To attract an additional worker, the firm must offer a higher wage. Crucially, this higher wage must be paid not just to the new worker but to all existing workers as well. This causes the Marginal Cost of Labour (MCL) to be greater than the Average Cost of Labour (the supply curve). A profit-maximising monopsonist will hire workers up to the point where MRP = MCL. However, it will pay the wage shown on the supply curve for that quantity of labour, which is lower than the MCL. This results in both lower employment and lower wages compared to a perfectly competitive market outcome.

Trade unions are organisations that represent workers, using collective bargaining to negotiate for higher wages and better working conditions. In a competitive market, a union that successfully negotiates a wage above the equilibrium will cause a decrease in employment. However, in a monopsonistic market, a union can act as a countervailing power. By setting a wage floor, the union makes the labour supply curve perfectly elastic up to a certain point. This alters the monopsonist's MCL curve. If the union negotiates a wage between the original monopsony wage and the competitive wage, it is possible to achieve both higher wages and a higher level of employment, moving the market outcome closer to the competitive ideal. This demonstrates that union intervention can sometimes correct market failure.

The National Minimum Wage (NMW) is a statutory pay floor set by the government, making it illegal for employers to pay workers less than a certain hourly rate. The theoretical effects depend heavily on the market structure. In a perfectly competitive labour market, an NMW set above the equilibrium wage will cause real-wage unemployment, as firms reduce their quantity demanded of labour while more people are willing to supply their labour. Conversely, in a monopsonistic labour market, a minimum wage can counteract the employer's wage-setting power. If set at an appropriate level (i.e., above the monopsony wage but below the competitive equilibrium), an NMW can raise both wages and the level of employment, thereby reducing the market failure associated with monopsony.