4.5 Wage Determination Under Collective Bargaining

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Wage Determination under Collective Bargaining 4.5

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Collective Bargaining

Collective bargaining is the process of negotiation between representative of firms &workers for the purpose of establishing mutually agreeable condition of employment. Thewage and fringe benefit of unionized workers are determined by collective bargaining.

Collective Bargaining is the process of negotiation between firms and workersrepresentatives for the purpose of establishing mutually agreeable conditions ofemployment. ILO has defined Collective Bargaining as, Negotiation about workingconditions and terms of employment between an employer and a group of employees orone or more employee, organisation with a view to reaching an agreement wherein theterms serve as a code of defining the rights and obligations of each party in theiremployment relations with one another.

In every free modern industrial society, trade unions are an accepted part of the industrial

scene. Labor unions are complex organizations, with various desires and goals. Some ofthese goals are purely economic, for example, favorable wage settlements and levels ofemployment. In addition, some of the things unions desire are non-monetary, although still

economic in the sense of having identifiable and quantifiable cost to the employer. Amongthis second group would fall various fringe benefits for example, contribution to pensionfunds, hospitilization programmes, paid holyday and so on. A third category union goalsmight be called indirect economic goal, in that their long-run effect is indirectly intended tobe economic improvement of the union member. This category includes control over laborsupply through apprenticeship regulation, union shop provision, restrictive working rules,and so on. Finally we may speak of some non-economic goals of unions, the goals of asocial or political nature.

Normally, a few months before a union-management contract is to run out, the parties willcome together to discuss a new contract. At this time, each side presents its views on whatthe new contracts terms should be. Seldom is agreement immediately reached, for theunion will suggest terms most favorable to its members, and the employer will counter withan offer favorable to its interests. During the intervening weeks before the contractdeadline, frequent sessions usually occur as the two parties attempt to find as acceptablecompromise. Contracts are not always settled by logic, however, and the treat of economicsanctions may be implicitly or explicitly used in the attempt to induce ones opponent to

come to terms.

Major bargaining Issues (content of collective bargaining agreements):

(i) Purely Economical Issues :Wage rate for different job categories, overtimerates, rules for tea break, fringe benefit,

(ii) Work Rules related Issues :Assignment & task, job security, work load(staffingrequirement)

(iii) Procedural Features related Issues:Rules of seniority, grievance handling fordispute and discharge, Laid off.


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Wage Determination under Collective BargainingUnion wage effect is one of the frequently investigated issues in the empirical economicstudies. The labour unions try to raise wages for their members by using their collectivebargaining power.From an economic point of view, unions attempt to raise the wages of their member abovecompetitive levels. They accomplish this goal in four ways:

(i) Restricting supply of labour;(ii)Using their collective bargaining power to raise standard wage rate directly;(iii)Increasing the demand for labour; and(iv)Restricting employers who possess monopoly power.

(i) Restricting supply of labour:One of the primary ways that union affect labour markets is by restricting supply of labour.Immigration barriers, maximum hour legislation, longapprenticeship, racial and sex barriers, and refusal to admitnew members into the union or let non union member hold

job all these strategies are restrictive devices to reducethe supply of labour.The figure displays the effect of directly restricting laboursupply. The effect of the afore mentioned measures wouldbe to restrict the supply of workers, in some specificindustries from SS to S1S1. The supply restriction wouldlower total employment and raise wage in certain labourmarket.

(ii) Using their collective bargaining power to raise standard wage rate directly:Most union do not directly restrict labour supply. Rather, they attempt to force employersto pay a standard wage higher than prevailing marketwage. For example, if non union plumbers earn tk.300per day in an area, a union might bargain with a largeconstruction firm to set the wage at tk. 400 per day forthat firms plumbers.Such an agreement is, however, valuable to the uniononly if access to alternative labour suppliers can be

restricted. Hence, under a typical collective bargainingagreement, firms agree not to hire non-union plumbers;nor can they contract out plumbing services; nor canthey subcontract to non-union firms. Each of theseprovisions helps prevention of erosion of the unionsmonopoly lock on the supply of plumbers to the firm.The figure shows the impact of agreed-upon highstandard wages, where the union force the employer topay wages at the standard rate shown by horizontal linerr.

(iii)Increasing the demand for labour:


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Labour unions also increase wages by increasing the demand for labour. This occurs eitherbecause of increase in the labours marginal product or through the means that increasethe derived demand for the labour by shifting the demand for the final product toward theoutput of union-made goods.Figure shows how a shift in the demand for unionized labour will shift up both a wage rates

and employment from E to E.There are many ways to shift labour demandcurve. Labour may help industry advertise itsproduct. Often, labour and management will lobbyfor an import quota on the product, therebyraising the demand for domestic workers in theindustry.

Sometimes, groups that function as unions (suchas professional association of doctors) will lobbyfor legislations that enforces the licensing ofparticular professions. By limiting the practice of

medicine, law, or other activities to specificgroups, the supply of competing professionals isreduced and the demand for the services of thepreferred group is increased.

In addition, unions can raise labour demand through increasing the efficiency (andtherefore the marginal productivity) of labour. For example, a century ago, workers werepaid so little that they were malnourished and their work was physically inefficient. Higherwages might have made them more efficient and resulted in lower production cost.

(iv) Restricting employers who possess monopoly power:When union sympathizers workers they argued that unions were necessary as a

countervailing power to large employers. In essence, the unions market power was

necessary to offset the employers market power. For example, suppose you live in acompany town. The dominant firm is the employer of the people who have jobs. As aemployee, you must take what this employer offers or go without work; your onlyalternative is to move to another region.

In this case, the employer is an monopsonist. To maximize profits, a monopsonist shouldhire additional worker up to the point where its marginal revenue product is equal to themarginal cost of labour (which is greater than the wage rate). The monopsonist thereforeboth depresses the wages and restricts employement relative to competitive markets.

Enter the labour union. After organizing the worker, it settles with the employer for astandard wage that is above the depressed monopsonistic wage level. At that higherstandard wage, the employer can hire all the workers it needs at a given wage rate; thefirm become a wage taker rather than wage maker. It will then become a competitivefirm that hires workers up to the point where the marginal revenue product equals thegoing standard wage rate. A union that exercise countervailing power may produce higherwages and higher employment
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Can trade union raise wageMany critics of union say that the belief that labor unions can substantially raise wages overthe long run and for the whole working population is one of the great delusions of the

economic analysis of the present age and this delusion is mainly the result of failure torecognize that wages are basically determined by labor productivity. It is for this reason, forexample, that wages in the United States were incomparably higher than wages in Englandand Germany all during the decades when the labor movement in the latter two countrieswas far more advanced.

The advocates of labour unions claim that they have raised wages and benefited workers.Lets start by reviewing the effects of unions on relative wages. Economists have estimatedthe economic impacts of unions by examining wages in unionized and nonunionizedindustries. On the basis of these analyses, economists have concluded that the unionworkers receive on average a 10 to 15 percent wage differential over non-union workers.

But can unions bootstrap the entire economy to a higher real wage? Most evidencesuggests not. The share of national income going to labour (including self-employment) haschanged little over the decades in most of the advanced economies. Once cyclical influenceson labours share are removed, we can see no appreciable impact of unionization on the

level of real wage. The evidenced from heavily unionized European countries suggests that,when unions succeed in raising money wage rates, they sometimes triggers an inflationarywage-price spiral with little or no permanent effect upon real wages. Moreover, economichistory shows that when inflation heats up, governments and central banks often institutepolicies to slow economic activity, resulting in higher unemployment rather than higher realwages.

4.5 Wage Determination Under Collective Bargaining

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