Wage Determination under Collective Bargaining 4.

Collective Bargaining Collective bargaining is the process of negotiation between representative of firms & workers for the purpose of establishing mutually agreeable condition of employment. The wage and fringe benefit of unionized workers are determined by collective bargaining. “Collective Bargaining is the process of negotiation between firm‟s and worker‟s representatives for the purpose of establishing mutually agreeable conditions of employment”. ILO has defined Collective Bargaining as, “Negotiation about working conditions and terms of employment between an employer and a group of employees or one or more employee, organisation with a view to reaching an agreement wherein the terms serve as a code of defining the rights and obligations of each party in their employment 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 of these goals are purely economic, for example, favorable wage settlements and levels of employment. 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. Among this second group would fall various fringe benefits – for example, contribution to pension funds, hospitilization programmes, paid holyday and so on. A third category union goals might be called indirect economic goal, in that their long-run effect is indirectly intended to be economic improvement of the union member. This category includes control over labor supply 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 a social or political nature. Normally, a few months before a union-management contract is to run out, the parties will come together to discuss a new contract. At this time, each side presents its views on what the new contracts terms should be. Seldom is agreement immediately reached, for the union will suggest terms most favorable to its members, and the employer will counter with an offer favorable to its interests. During the intervening weeks before the contract deadline, frequent sessions usually occur as the two parties attempt to find as acceptable compromise. Contracts are not always settled by logic, however, and the treat of economic sanctions may be implicitly or explicitly used in the attempt to induce one‟s opponent to come to terms.

Major bargaining Issues (content of collective bargaining agreements): (i) (ii) (iii)
Purely Economical Issues : Wage rate for different job categories, overtime

rates, rules for tea break, fringe benefit, Work Rules related Issues : Assignment & task, job security, work load (staffing requirement) Procedural Features related Issues: Rules of seniority, grievance handling for dispute and discharge, Laid off .

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Wage Determination under Collective Bargaining 4.5
Wage Determination under Collective Bargaining
Union wage effect is one of the frequently investigated issues in the empirical economic studies. The labour unions try to raise wages for their members by using their collective bargaining power. From an economic point of view, unions attempt to raise the wages of their member above competitive 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, long apprenticeship, racial and sex barriers, and refusal to admit new members into the union or let non union member hold job – all these strategies are restrictive devices to reduce the supply of labour. The figure displays the effect of directly restricting labour supply. The effect of the afore mentioned measures would be to restrict the supply of workers, in some specific industries from SS´ to S1S1´. The supply restriction would lower total employment and raise wage in certain labour market.

(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 employers to pay a standard wage higher than prevailing market wage. For example, if non union plumbers earn tk.300 per day in an area, a union might bargain with a large construction firm to set the wage at tk. 400 per day for that firm‟s plumbers. Such an agreement is, however, valuable to the union only if access to alternative labour suppliers can be restricted. Hence, under a typical collective bargaining agreement, firms agree not to hire non-union plumbers; nor can they contract out plumbing services; nor can they subcontract to non-union firms. Each of these provisions helps prevention of erosion of the union‟s monopoly lock on the supply of plumbers to the firm. The figure shows the impact of agreed-upon high standard wages, where the union force the employer to pay wages at the standard rate shown by horizontal line rr.

(iii)Increasing the demand for labour:

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Wage Determination under Collective Bargaining 4.5
Labour unions also increase wages by increasing the demand for labour. This occurs either because of increase in the labour‟s marginal product or through the means that increase the derived demand for the labour by shifting the demand for the final product toward the output 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 demand curve. Labour may help industry advertise its product. Often, labour and management will lobby for an import quota on the product, thereby raising the demand for domestic workers in the industry. Sometimes, groups that function as unions (such as professional association of doctors) will lobby for legislations that enforces the licensing of particular professions. By limiting the practice of medicine, law, or other activities to specific groups, the supply of competing professionals is reduced and the demand for the services of the preferred group is increased. In addition, unions can raise labour demand through increasing the efficiency (and therefore the marginal productivity) of labour. For example, a century ago, workers were paid so little that they were malnourished and their work was physically inefficient. Higher wages 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 union‟s market power was necessary to offset the employers‟ market power. For example, suppose you live in a company town. The dominant firm is the employer of the people who have jobs. As a employee, you must take what this employer offers or go without work; your only alternative is to move to another region. In this case, the employer is an monopsonist. To maximize profits, a monopsonist should hire additional worker up to the point where its marginal revenue product is equal to the marginal cost of labour (which is greater than the wage rate). The monopsonist therefore both depresses the wages and restricts employement relative to competitive markets. Enter the labour union. After organizing the worker, it settles with the employer for a standard wage that is above the depressed monopsonistic wage level. At that higher standard wage, the employer can hire all the workers it needs at a given wage rate; the firm become a „wage taker‟ rather than „wage maker‟. It will then become a competitive firm that hires workers up to the point where the marginal revenue product equals the going standard wage rate. A union that exercise countervailing power may produce higher wages and higher employment

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Wage Determination under Collective Bargaining 4.5
Can trade union raise wage
Many critics of union say that the belief that labor unions can substantially raise wages over the 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 to recognize that wages are basically determined by labor productivity. It is for this reason, for example, that wages in the United States were incomparably higher than wages in England and Germany all during the decades when the “labor movement” in the latter two countries was far more advanced. The advocates of labour unions claim that they have raised wages and benefited workers. Let‟s start by reviewing the effects of unions on relative wages. Economists have estimated the economic impacts of unions by examining wages in unionized and nonunionized industries. On the basis of these analyses, economists have concluded that the union workers 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 evidence suggests not. The share of national income going to labour (including self-employment) has changed little over the decades in most of the advanced economies. Once cyclical influences on labour‟s 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 inflationary wage-price spiral with little or no permanent effect upon real wages. Moreover, economic history shows that when inflation heats up, governments and central banks often institute policies to slow economic activity, resulting in higher unemployment rather than higher real wages.

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