Cambridge International as and a level Economics Ebook

Figure 8.16 
Eff ects of an increase in the supply of labour
209
Chapter 8: Government microeconomic intervention

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Wage determination in 
imperfect markets
The role of trade unions and government 
in wage determination
So far in our analysis of how wages are determined we 
have assumed that the respective forces of demand and 
supply operate freely with no intervention. In many 
respects this is an unrealistic assumption as in many 
labour markets, the demand and supply of labour are 
W
Quantity of labour
D
D
0
W
age rate 
S
L
Transfer
earnings
Economic
rent
W
Quantity of labour
0
W
age rate 
S
Economic
rent
W
Quantity of labour
D
0
W
age rate 
S
Transfer
earnings
(a)
(b)
(c)
Figure 8.17 
Transfer earnings and economic rent in the 
labour market
aff ected by the actions of trade unions and governments. 
Such interventions produce what are sometimes referred to 
as imperfections in the labour market.
Trade union members protesting over job cuts
Trade unions are organisations that seek to represent 
labour in their place of work. Th
ey were set up and 
continue to exist because individuals (labour) have very 
little power to infl uence conditions of employment, 
including wages. Th
rough collective bargaining, where 
trade union representatives get together with employers, 
trade unions aim to:
■
increase the wages of their members
■
improve working conditions
■
maintain pay diff erentials between skilled and unskilled 
workers
■
fight job losses
■
provide a safe working environment
■
secure additional working benefits
■
prevent unfair dismissals.
Traditionally, in the UK, trade unions have been strong 
in the public sector and manufacturing and less important 
in the service sector. Th
ey are, however, particularly 
strong in the transport industry. As the structure of the 
UK economy has changed, so total membership has fallen 
to around 6.5 million workers in 2012, less than one in 
four of the working population. Consequently, the power 
of the trade union movement is not as strong as it was 
when membership was at a peak of 11 million in 1979.
Economic analysis suggests that, in a competitive 
labour market, a powerful trade union is able to secure 
wages for its members above the equilibrium wage 
rate explained earlier in 
Figure 8.14.
 Th
e basis for this