A common economic model treats labor unions as creating market power on the seller side of the labor market. In that sense, a union can resemble a cartel: instead of many workers competing independently, workers bargain collectively over wages and working conditions. However, the analogy is imperfect because unions are also organizations that negotiate non-wage benefits, improve workplace safety, and address bargaining imbalances between employers and employees.
How unions can create a labor-market "cartel"
A cartel is a group of sellers that coordinates to influence prices or output. In labor markets:
- Individual workers are the "sellers" of labor.
- Employers are the "buyers" of labor.
- A union coordinates workers so they bargain as a single group rather than individually.
The union may:
- Negotiate a minimum wage for all covered workers.
- Restrict employers from hiring non-union workers in certain settings.
- Organize strikes if employers refuse agreed terms.
- Standardize pay scales across firms.
This coordination reduces wage competition among union members, much as a product cartel reduces price competition among firms.
Why unions may increase wages
If employers have significant bargaining power—for example, because there are only a few major employers in a region (an employer-side concentration sometimes called a monopsony or oligopsony)—workers may receive wages below the value of what they produce.
Collective bargaining can:
- Increase workers' negotiating leverage.
- Capture more of the value workers create.
- Improve benefits, job security, and working conditions in addition to wages.
In this situation, higher union wages do not necessarily reduce employment and may even increase it if employers had previously exercised substantial buying power.
The classic trade-off: higher wages versus employment
In a competitive labor market, the standard supply-and-demand model predicts the following:
- If the union negotiates wages above the competitive market wage:
- Employers demand fewer workers because labor becomes more expensive.
- More people want union jobs because they pay more.
- The result can be unemployment or reduced hiring among union-covered jobs.
For example:
- Competitive wage: $25/hour
- Union-negotiated wage: $30/hour
An employer that previously hired 100 workers might now hire only 90 if the higher wage raises costs enough to reduce labor demand.
The workers who keep their jobs earn more, while some potential workers may not be hired or may lose employment.
Factors affecting the size of employment losses
The employment effect depends on several factors:
- Elasticity of labor demand: If employers can easily substitute machines or relocate production, employment losses tend to be larger.
- Industry competitiveness: Firms facing intense global competition have less ability to absorb higher labor costs.
- Productivity gains: If higher wages improve morale, reduce turnover, or encourage training, employment losses may be smaller.
- Employer market power: Where employers have monopsony power, unions may raise both wages and employment by moving compensation closer to competitive levels.
Other trade-offs
Potential benefits:
- Higher wages
- Better health insurance and pensions
- Improved workplace safety
- Lower turnover
- More predictable scheduling
- Greater worker voice in workplace decisions
Potential costs:
- Reduced employment in some industries
- Higher prices for consumers if firms pass on labor costs
- Reduced flexibility in staffing or pay structures
- Barriers to entry for non-union workers if access to union jobs is limited
What economists have found
Empirical research does not support a single universal effect:
- Unions generally raise wages for covered workers, often by around 10–20% on average, though estimates vary by country, industry, and time period.
- Employment effects range from small to moderate and depend heavily on market conditions.
- In labor markets where employers have substantial bargaining power, unions can increase wages with little employment loss and, in some cases, increase employment.
- In highly competitive industries where firms have little pricing power, wage increases are more likely to reduce employment or accelerate automation and relocation.
Bottom line
The "union as cartel" model captures one important aspect of collective bargaining: workers coordinate to increase their bargaining power and negotiate higher compensation. However, modern labor economics emphasizes that this framework is incomplete. Whether higher union wages come at the cost of lower employment depends critically on the structure of the labor market. In a perfectly competitive market, higher negotiated wages tend to reduce employment. In markets where employers have significant buying power, unions can sometimes improve both wages and employment by offsetting that imbalance.
