Introduction to Economics                                 Lesson 11 / 08



Throughout most of the C20, unions played a major, perhaps dominant, role in the workings of the Australian labour market.  However the last few decades has seen a significant decline in their power, membership and influence, such that today many commentators question their ongoing viability and relevance.


A union, more precisely a trade or labour union, is a continuing organization of workers, formed for their mutual benefit and protection.  Like corporations, they are often endowed with legal personalty, enabling them to possess property, to sue and be sued in their own name, and otherwise to be recognized legally, much as a natural person.

Traditionally unions have offered a range of benefits to their members such as training, insurance, welfare assistance, accreditation and social interaction.  Provision of many such activities have been overtaken or rendered unnecessary by the growth in the general welfare activities of the state.  The principal activities of unions however have been, and remain, to act as a labour cartel with respect to employers, and to agitate with respect to governments for increased rights and privileges for their members.

The nature and significance of unions varies greatly between countries, depending on the culture and political circumstances of the country in which they operate.  Although international unions do exist, unions have traditionally been focused nationally or, even less ambitiously, within part of a country, such as within a state, a locality, or even just a particular factory or workshop. In Anglo-Saxon countries, unions generally have tended to play, at least until recently, a major role in the economic and political activities of their respective nation.

There are various types of unions, basically distinguished by the membership for which they cater.  Excluding associations of professionals, such as lawyers, doctors, architects and so forth, which arguably could be categorized as unions, they include craft unions, industry unions and general unions. 

Craft unions aim to represent all members of a particular craft or trade such as carpenters, plumbers, and firemen, regardless of the industry in which they are employed, to the extent even, in some instances, of including employers as well as employees.  Conversely industry unions seek to represent all workers employed in a particular industry, such as entertainment, steel making or transport.  Finally there are general unions, which seek to represent all workers or employees, based on their class as such, without regard to industry or trade.

Apart from their organization and membership, the types of unions tend to reflect significant political and philosophical differences.  Craft unions are more individualistic, conservative and defensively orientated.  Industry unions are more collectivist, expansionist and aggressive, whilst general unions, being essentially class based, are seen as the most radical, activist and politicized.


 The history, politics and philosophy of unions are each major areas of study.  The focus of this lecture, however, is on economics. The popular viewpoint of unions is that they have had, and continue to have, a positive economic effect.  Most economists however, at least most market economists, are likely to regard unions as having a negative economic effect.

Perhaps the single most important area of union economic activity is that of the fixing of wages. The widely accepted view is that the relatively high level of wages enjoyed generally in most industrialized countries is a result of union action.  Moreover, that such raised level of wages has come at no cost to wage earners or to the economy generally, but has occurred merely by a more equitable and beneficial reduction in the profit margin of employers.

Economics suggests that this popular viewpoint is a myth.  To economists generally, labour is a commodity, able to be bought and sold in a market.  It is perhaps the most important commodity of all since it is the one asset that everyone [or virtually everyone] possesses and is able to sell. 

In economic terms, what determines the level of wages is the marginal productivity of labour.  That is to say, a person will earn from his labour almost, but not quite, precisely, the value of what his labour produces, since it will pay an employer to provide the worker with such a wage, enabling the employer thereafter to achieve a profit from the marginal residue of such worker’s productivity.  Competition from employers, or potential employers, in the labour market, thus tends to cause such a marginal or natural wage to ensue. 

What distinguishes, and causes, the relatively much greater wages paid for labour in advanced economies is the much greater amount of capital available in such economies to its workers.  It is the amount of capital available which provides the tools for the job, thereby enabling the productivity or output of workers in advanced economies to far exceed those of less capitalized economies and enables them to receive such higher wages.  All else being equal, the more capital invested, the higher the wages received.

If, by whatever means, a union is able to achieve remuneration for its workers above the ‘natural wage’ then, if the employer is to remain in business, it will be necessary, assuming minimum wage and / or anti discrimination laws permit it, for the employer to balance such increase by reducing the pay of his or her non-union workers to less than their ‘natural wage’.  The American economist, Milton Friedman suggests that unions have increased the wages of about 10-15% of American employees by 10 –15% by reducing the wages of the remainder by 4%.  Union gain is thus non-union pain.

Alternatively the employer can reduce the size of his labour bill by dismissing the less productive of his or her workers until the productivity of the marginal worker again equals the ‘natural wage’. If the employer is able instead to increase his or her prices thereby to maintain profit margin then all else being equal, consumers will have less money to spend with other producers, who will in turn reduce the number of their workers.  In either event, the result for the economy as a whole is increased unemployment.

Economically it is not feasible for the increase in wages above the ‘natural wage’ to come long-term from the employer’s profit.  Normally, the profit margin represents only a very small proportion of income; the vast bulk is wages.  Competition from other, or would-be entrepreneurs ensures that profit margins tend towards the minimum level needed to cause an employer to enter or remain in business.  Reducing the profit margin to pay above market wages will tend to drive them out of business. 

In any event, it is from the profit margin that the employer will obtain the capital needed, as indicated above, to increase or at least maintain the existing wage level.  Reduced profit means less capitalization.   Decapitalization results in reduced productivity and reduced wages for all.

It is sometimes alleged that unions, by causing wages to rise above market rates, cause inflation.  This is a myth; all else being equal, increased wages for some merely means less wages or unemployment for others.  It does not of itself cause inflation.  However what tends to follow is that having thereby created unemployment, unions insist on generous unemployment benefits being provided by the state.  In order to do this the state, rather than increasing taxes, creates money.  It is the state’s creation of money, rather than above market wages that causes inflation.

Causing above market local wage rates leads unions to support protectionism in order to prevent overseas competition.  Unions have also sought to prevent local employers from operating overseas, unless they provide overseas employees with the same or similar wages or conditions as they are required to pay at home.  Ostensibly this is to be fair to overseas workers.  Such purported justification, essentially unwelcome to overseas workers, who are thereby deprived of much desired work, is manifestly specious.  Rather it constitutes a sophisticated form of union protectionism.

Whilst the above criticisms are significant, it is not to suggest that unions do not have a proper or desirable economic role to play in providing representation, training or support for their members.


                       David Sharp

                       12 August 2008




Return to the Home Page