Labor Union and Minimum Wage Law

Labor Unions & Minimum Wage Law
A labor union is an organization of workers that negotiates with employers over

wages and working conditions. A labor union seeks to change the balance of power
between employers and workers by requiring employers to deal with workers
collectively, rather than as individuals. Thus, negotiations between unions and firms
are sometimes called collective bargaining.
The subject of labor unions can be controversial. Supporters of labor unions view
them as the workers’ primary line of defense against efforts by profit-seeking firms
to hold down wages and benefits. Critics of labor unions view them as having a
tendency to grab as much as they can in the short term, even if it means injuring
workers in the long run by driving firms into bankruptcy or by blocking the new
technologies and production methods that lead to economic growth
HIGHER WAGES FOR UNION WORKERS
Why might union workers receive higher pay? What are the limits on how much higher pay
they can receive? To analyze these questions, let’s consider a situation where all firms in an
industry must negotiate with a single union, and no firm is allowed to hire nonunion labor. If no
labor union existed in this market, then equilibrium (E) in the labor market would occur at the
intersection of the demand for labor (D) and the supply of labor (S) in Figure 2. The union can,
however, threaten that, unless firms agree to the wages they demand, the workers will strike.
As a result, the labor union manages to achieve, through negotiations with the firms, a union
wage of Wu for its members, above what the equilibrium wage would otherwise have been.
Figure 2. Union Wage Negotiations. Without a union, the equilibrium at E would have involved
the wage We and the quantity of labor Qe. However, the union is able to use its bargaining
power to raise the wage to Wu. The result is an excess supply of labor for union jobs. That is, a
quantity of labor supplied, Qs is greater than firms’ quantity demanded for labor, Qd.
This labor market situation resembles what a monopoly firm does in selling a product, but in
this case a union is a monopoly selling labor to firms. At the higher union wage Wu, the firms in
this industry will hire less labor than they would have hired in equilibrium. Moreover, an excess
supply of workers want union jobs, but firms will not be hiring for such jobs.
From the union point of view, workers who receive higher wages are better off. However,
notice that the quantity of workers (Qd) hired at the union wage Wu is smaller than the
quantity Qe that would have been hired at the original equilibrium wage. A sensible union must
recognize that when it pushes up the wage, it also reduces the incentive of firms to hire.
What Is a Minimum Wage?

A minimum wage is the lowest wage per hour that a worker may be paid, as mandated
by federal law. It is a legally mandated price floor on hourly wages, below which workers
may not be offered or accept a job.
Special Considerations
Like all price floors, a minimum wage law only has a measurable effect when set above
the market clearing price for a transaction. For example, a minimum wage of $10 per
hour will not affect workers whose marginal productivity in a given line of work is
greater than $10 per hour. The legal supply and demand rate remains unchanged for
such labor.
For those with marginal productivity less than $10 per hour, however, a $10 per hour
minimum wage creates an artificial shortage of profitable labor. An unskilled worker
with marginal productivity of $8 per hour in California or Massachusetts can only offer
to work at a loss to their potential employer. This means the employer can only hire the
worker if they are willing to pay more in salary than the marginal revenue produced by
the worker or if the employer incorrectly estimates the worker's marginal productivity
to be above $10 per hour.
Advantages and Disadvantages of Minimum Wages

Minimum wage laws are designed to stamp out exploitation of workforces and ensure
that a country's working population does not fall below the poverty line. As the price of
goods rises, so should the minimum wage.
However, critics point out that companies, not the government, should decide how
much staff deserves to be paid. There is a high elasticity of demand for low-skilled labor.
This means that a small change in the price for low-skilled labor could have a large effect
on its demand. As a result, too high a minimum wage could lead to increasing
unemployment among the low-skilled.
In modern times, the proliferation of improved technology also increases the marginal

rate of technical substitution for low-skilled labor. When the cost of labor increases,
companies find it increasingly profitable to switch to labor-replacing technology.

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Labor Unions & Minimum Wage Law

A labor union is an organization of workers that negotiates with employers over

HIGHER WAGES FOR UNION WORKERS

What Is a Minimum Wage?

Advantages and Disadvantages of Minimum Wages

In modern times, the proliferation of improved technology also increases the marginal

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