Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

 
4.6 COLLECTIVE BARGAINING 
We now move on to look at the results of the fact that 
workers are able to combine in trade unions to press wage claims. 
Let us assume that the workers in a particular industry, who have 
not previously been unionised, decide to set up a trade union. 
There has previously been perfect competition between workers in 
the industry. The trade union is now formed and goes to the 
employers. They agree that every man whom they employ will, in 
future, be paid £35 a week, neither less nor more. Let us also 
assume that the agreement is put into force completely, and that 
once it is in operation the trade union indulges in no strikes, and 
the employers in no lockouts. Work goes on as usual. What will be 
the result? 
We shall confine our attention to situations where a trade 
union presses for a higher wage but does not make any 
stipulations about the numbers of workers to be employed. In fact, 
of course, being a monopolist, a trade union will have to take 
account of the fact that a rise in the price of labour will probably 
alter the amount demanded. In practice, the main concern of trade 
unions is with the level of wagers, if only because it is almost 
impossible to control levels of employment. We assume here that 
when a wage-bargain is made, all members of the union are 
prepared to offer their services at the agreed wage. The supply 
curve of labour is therefore a horizontal straight line at this wage. 
Clearly, the conditions of demand and supply for labour are 
altered. Instead of perfect competition between sellers in the 
labour market, there is monopoly. If the marginal revenue 
productivity curve for labour slopes downwards, there is a distinct 
possibility that fewer workers will now be employed. For the 
supply curve of labour will become horizontal instead of being 
vertical or upward-sloping, and we are assuming that the 
equilibrium wage will rise too. Workers are unlikely to combine in 
trade unions except with the aim of raising wages. 
However, the problem is complex. The results of collective 
bargaining will differ according to circumstances in the markets for 
the factor and the product. There are four main combinations of 
circumstances, assuming as we shall do throughout that there is 
perfect competition between buyers in the product market. Now 
that there is collective bargaining, we are also assuming that there 
is monopoly instead of perfect competition between sellers in the 
labour market. The four possible situations are these: (a) Perfect 
competition between sellers in the product market and between 

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buyers in the labour market, (b) Perfect competition between 
sellers in the product market, but a monopsonist buying in the 
labour market, (c) A monopolist seller in the product market but 
perfect competition between buyers in the labour market, (d) A 
monopolist selling in the product market and a monopsonist 
buying in the labour market. We shall consider the results of the 
advent of a trade union in each of these four cases.