A union is a formal organization of workers who have banded together to achieve common goals such as protecting the integrity of its trade, achieving higher pay, increasing the number of employees an employer hires, and better working conditions. They function by negotiating with employers to create a collective agreement that applies to all union members and typically lasts for a set time period. For example, in a unionized industry, rather than each employee negotiating his or her own vacation time with the employer, a union will negotiate with the firm in order to create a contract governing vacation time that applies to every union member. This gives workers as a whole a stronger bargaining position when negotiating working conditions and pay.
Trade unions in their current form became popular during the industrial revolution, when most jobs required little skill or training and therefore almost all of the bargaining power fell with employers rather than employees. While unions have many goals, their primary objective has historically been to achieve higher wages for members of the union - that is, those who are already employed in an industry.
Unions are able to raise wages because, when they are powerful, they may turn the labor market into a monopoly market. Rather than a competitive market with many buyers (employers) and sellers (employees), there are many buyers but only one seller: the union. Like any monopoly market, the outcome will be an equilibrium with higher prices and lower supply than in the competitive equilibrium. In the case of the labor market, this means that wages will be higher, but so will unemployment. This is illustrated in the graphic, in which a union successfully raises the wage rate above the equilibrium wage. The gap between the point where the new wage rate intersects the demand curve and where it intersects the supply curve represents the resulting unemployment .
Raising Wages Above Equilibrium
If a union is able to raise the minimum wage for their members above the equilibrium wage, then wages will be higher but fewer workers will be employed.
Many economists criticize unionization, arguing that it frequently produces higher wages at the expense of fewer jobs. Essentially, unionization benefits the already employed at the expense of the unemployed. Further, by charging higher prices than the equilibrium wage rate, unions promote deadweight loss. Critics also argue that if some industries are unionized and others are not, wages will decline in non-unionized industries.
Unions in Imperfect Labor Markets
The above arguments assume that without unions, the labor market would be competitive - that is, there would be many buyers and many sellers of labor. In this competitive equilibrium, the wage rate would equal the marginal revenue product of labor and the outcome would be efficient. In reality this is often not the case. Rather, many industries are dominated by only a few firms, making the labor market an oligopsony - a market with many sellers of labor but only a few buyers. In an oligopsony firms have the advantage over workers, and wages may be lower than they would be at the competitive equilibrium.
If we assume that the labor market is imperfect and that wages are naturally lower than the marginal revenue product of labor, unions may increase efficiency by raising wage rates closer to the efficient level. In this case, wages will rise without a resulting rise in unemployment.
Unions, Productivity, and Unemployment
The above arguments focus on how unions affect unemployment by negotiating for higher wages, but unions may also affect unemployment in other ways. Many argue that unions are capable of raising productivity by reducing turnover, increasing coordination between workers and management, and by increasing workers' motivation. More productive workers means a higher marginal product of labor. Since the demand for labor is determined by its marginal product, increased productivity will cause demand to shift to the right and lead to an efficient equilibrium with both higher wages and lower unemployment.