Factors affecting the ability of trade unions, Managerial Economics

FACTORS AFFECTING THE ABILITY OF TRADE UNIONS TO GAIN LARGER WAGE INCREASES FOR ITS MEMBERS

The basic factor is elasticity of demand for the type of labour concerned.  The elasticity of demand for any particular type of labour will vary according to four factors:

1. The physical possibility of substituting alternative factors of production for labour

If wages rise, labour will be relatively more expensive than the factors which will tend to be substituted for it.  The extent to which this is possible will depend on technical    considerations.  The more substitution is possible, the greater will be the elasticity of demand of labour.

2. The elasticity of supply of alternative factors:

If substitution is technically possible, the demand for alternative factors will increase and this will result in a rise in their prices.  The extent of the rise will depend on the elasticity of supply.  The more elastic this is, the greater will be the increase in price, the smaller the substitution of factor for labour, hence the lower the elasticity of demand for labour itself.

3. The proportion of labour to total cost:

If the proportion is large, the demand for labour will tend to be elastic for two reasons.

First, as the percentage of total costs formed by labour is large, there will be considerable pressure to find substitutes for labour.  Second, the effect of a rise in labour costs will result in a larger increase in total costs.

4. The elasticity of demand for the final product:

An increase in wages will raise the price of the final product.  The extent of the price  increase will be determined by the three factors above.  If the demand for the good is elastic the quantity purchased will fall considerably and so will the demand for labour, which produces the good.  The opposite will apply where the demand for the good is inelastic.  There are some circumstances in which a wage increases need not result in a higher price for a good.  Firms may be earning above-normal profits and the increase in wages may be paid out of these without raising the price of the final product.  Alternatively, the increased wage may be paid out of increased productivity.

If the demand is elastic, employment will be sensitive to wage changes and this will be a basic constraint on trade union behaviour.  If the demand is inelastic, a wage increase will have relatively little effect on employment and trade unions will be able to press for, and obtain, large increases in the pay of its members.  Trade unions in different industries differ in terms of their strength (as, for example, measured by the extent of their membership), degree of militancy, general approach, whether in the private or public sector, and so on.

Posted Date: 11/30/2012 2:24:38 AM | Location : United States







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