Trade Unions

A collective association of workers whose aim is to improve the pay and conditions of member workers.

Aim to:

·     Improve real incomes

·     Working conditions

·     Pensions

·     Security

·     Unfair dismissal

·     Counter monopsony power

·     Protect against discrimination

Trade union membership has declined to less than 30% of all those employed in the UK (2007). Reasons for this include:

·     Membership is considered to be a waste since the economy was in a boom creating less of a need to bargain for higher wages

·     Tougher employment laws

·     Little evidence for significant mark-ups in wage levels bought about by trade unions

·     You become less employable if you belong to a trade union

·     Changes to the labour market: decline in jobs in heavy industry to more service sector based, shifts towards shorter employment contracts and more people working part-time/flexible hours

·     Some employers restricted trade unions in their work place

Unions influence pay by:

Ø     Collective bargaining

o      negotiate pay levels above the current levels that exist. This is only effective if the union has control over the total labour supply available in the industry.

Ø     Closed shop agreement – employer and union agree that all workers be part of the union

o      Pre-entry: workers must join the union before starting employment

o      Post-entry: non trade union members get the job but have to join to keep the job. This prevents free-riders benefiting from the mark up bought by the union on wages

o      This was considered to be a labour restrictive practice and is now illegal in the UK

Pre-entry closed shop

The diagram below briefly displays a pre-entry closed shop agreement made by unions.

S1 shows the supply for labour in the market before the closed shop agreement. Supply shifts to the left and becomes more inelastic because the increase in wages has minimal effect on employment if the workers have already been employed by the firm. Employment still, however, falls from L1 to L2 when wages rise from W1 to W2.

Perfectly competitive market

To refresh your memory of the PC market, click on the revision notes of the PC market in the short run and long run.

This diagram shows the effects of a trade union in a perfectly competitive market. The equilibrium wage rate is W1 where the number of workers employed is L1. The effect of the trade union is that wages are pushed up to W2 à the acceptable wage rate for union members. The supply curve becomes W2XS. From W2X, the supply curve is perfectly elastic. Along XS, the curve is upwards sloping because more workers are attracted to higher wage rates. The employer wishes to hire L3 workers but the number of workers willing to work at the wage rate of W2 is L2. Thus there is excess supply of labour, causing classical unemployment between L2- L3. 

This diagram argues that the trade union causes unemployment, however one can counter-argue, as in the Keynesian view. It is unrealistic to assume that demand conditions remain unchanged because higher wages would normally increase demand for output, thus increasing output and increasing demand for workers to produce more output.

This diagram can also be used to explain the effect of the National Minimum Wage, as well as trade union mark-ups.

Look out for more on the effects of trade unions in a monopsonistic market soon! (To prepare yourself, you could read Word of the Day)

Case Study for Supply Side Economy

A new government scheme has been launched today to tackle our sluggish economic growth. 'Business Link' (for more information and research, visit their website) has started a new scheme called 'My New Business' to give advice to potential entrepreneurs. Could this be a potential supply side policy aimed at shifting our LRAS curve rightward?

Read this short article which explains the potential benefits the scheme will bring to our economy. Click here.

To find out more about supply side policies and supply side economics, see my notes posted here!

The New Global Economics

On Monday 14th November, one of a two part programme will be on at 8:00pm about the future of the global economy. The show will be broadcast by Martin Wolf, the chief economics commentator of the FT, where he'll discuss the short and long run effects and how things will be changing in the world.

Please do listen to it, if you can't then listen on iplayer when convenient for you, because this programme will give you valuable analysis that you can use in your exam and possible case studies...etc. To find out more about the programme, click here.

The Credit Crunch

For those of you who are unsure what the 'credit crunch' is, and how it started, watch this simplified, but concise video that explains it.

http://www.youtube.com/watch?v=wGxmgwUWNr0&feature=related

To summarise, occurring in 2008, the credit crunch was the result of over lending to people who are high risk and thus the inability of debtors to pay back their loans. In a simplified version, banks make money through a process called credit creation, lending more than is initially deposited. They know that people will deposit money back into the bank that they borrowed from and so can afford to lend more than they have (given a low liquidity ratio: the proportion of their assets - savers' money - that they keep).

Code for Fiscal Stability (1998)

·     Based on the 5 principles of tax

o      Equitable

o      Economical

o      Efficient

o      Convenient

o      Flexible

Includes:

·     The Golden Rule

o      The government should only borrow to fund new social capital (capital spending, i.e. schools, roads…etc) and not current spending (e.g. welfare benefits)

·     The Sustainable Investment Rule

o      Public sector net debt should not rise above 40% of national income at the end of each financial year of the economic cycle

·     If the government stuck to the two rules, the public sector budget should, in theory, balance out over the course of one economic cycle because the government is not increasing current spending. A deficit is run on capital spending instead, thus balancing it out.

·     Aims

o      To limit how much the government borrows and for what purpose

o      Allow automatic stabilisers (see here) to smooth over the economy

o      Support the role of the monetary policy

o      Avoid an unsustainable increase in public sector debt

o      Ensure that tax revenues that are collected finance public spending as far as possible

·     Australia and New Zealand had a similar code

·     The government complied with the rules from the full economic cycle between 1997-1998 to 2006-2007, just before the recessions/economic crisis.

·     In November 2008, it was written in the pre-budget report that the code had been suspended to allow for the government to act appropriately in response to the global recession.

·     It was replaced by a less restrictive ‘temporary operating rule’ where the target was to manage public finances over the medium term. 

Please note, the Fiscal Policy Framework and the Code for Fiscal Stability should be used in the exam for demonstrating your understanding of past and previous fiscal policy used by governments. As it is no longer in use, be careful when mentioning in the exam.

Stealth Tax

An indirect tax that government's try to implement as they think people will not notice them. They can be thought of as being 'secretly' implemented.

When the UK government introduced the Fiscal Policy Framework and the Code of Fiscal Stability (1998), one disadvantage was that it didn't stop the introduction of stealth taxes. For more on the Code of Fiscal Stability, look here

Tuition fees

Hi everyone, I would first like to apologise for the inactivity on my blog.

Second, I've just read something intriguing about universities and tuition fees. This article here, from The Independent, explains that universities have appealed to the Offa (Office for Fair Access), the universities watchdog, to try and amend the agreement they made earlier this year, to try to reduce their fees.

27 universities have appealed, possibly suggesting a price war in the higher education market. Is this a case against the market provision of higher education?

This is a good example of a possible price war that is currently occurring and a good example to use in the exam.