Answer to Question #173929 in Economics for Daniel Boateng

Question

why would a union reduce the demands for a pay increase without consulting it's members 

Answer 1

The belief that unions can significantly raise real wages over the long term and for the entire working class is one of the greatest delusions of our century. At the heart of this misconception is a misunderstanding that wages are essentially productivity-driven. It is for this reason, for example, that wages in the United States were incomparably higher than in Great Britain and Germany during the decades when the "labor movement" in these countries was much stronger.

Despite the abundant evidence that productivity is the fundamental determinant of wages, this finding is usually forgotten or ridiculed by union leaders and a large group of economists seeking a reputation for echoing "liberals". But this conclusion is not based on the assumption that they believe that employers are generally kind and noble people who strive to do good. It is based on a completely different assumption - that every employer strives to maximize their profits. If people are willing to work for less than their work is really worth, then why the employer does not use it to the maximum benefit for themselves? Why doesn't he, for example, earn $ 1 a week from a worker, and not just watch another employer earn $ 2 a week from him? As long as this situation exists, each employer will add up the price of workers to their full economic value.

All of this does not mean that trade unions cannot perform any useful or legitimate function. The main function they can perform is to improve local working conditions and to ensure that all their members receive a real market value for their services.

The competitive struggle of workers for work, employers for workers is not so cloudless. Neither individual workers nor individual employers are generally fully informed about labor market conditions. The individual worker may not know the true market value of his services to the employer, and therefore his position in the transaction of the parties may be weakened. Errors in assessing the situation are much more costly for the worker than for the employer. If an employer mistakenly refuses to hire a person whose services could bring him a profit, he only loses the net profit that he would have received by hiring that person, and he can hire a hundred or a thousand people. But if a worker refuses to work, believing that he can easily find another where he will be paid more, such a mistake can cost him dearly, since it is about his livelihood. First, he may not be able to quickly find a job with a higher salary; secondly, it is possible that for some time he will not be able to find a job, even in the long term, assuming such a salary. And time can become the crux of the worker's problem, as he and his family need to eat. Therefore, in order not to tempt fate and not take risks, he can take up work with a salary that, in his opinion, is lower than his “real value”. When workers interact with employers through unions and demand “standard wages” for certain jobs, they can equalize the power of the parties to the deal and the risks of error.