EMPLOYMENT LAW

EMPLOYMENT LAW

EMPLOYMENT LAW

Part A

Referring to the scenario there are strong theoretical reasons for expecting that when collective bargaining raises the cost of employment above the competitive level, it will have an adverse effect upon the distribution of employment and unemployment.

1- First, because the demand for labour depends upon that for the goods and services it produces, bargaining up the pay of a particular category of workers above the competitive level is likely to cause employers to hire less of it. The reaction may not be immediate because it takes time to reorganise production and to invest in alternative methods, but in the long run, a higher price will lead to less of that category being hired. Second, fixing either standard rates of pay irrespective of individual performance, or compressing wage differentials raises the price of less efficient workers within a particular job category, and reduces incentives for the more efficient and the more skilled. The latter may depress the organisation's performance, and thus its sales, and potentially employment. Third, collective bargaining, especially at enterprise level, by giving disproportionate weight to the interests of incumbent workers, may establish hiring and lay-off provisions which reduce job opportunities for unemployed workers. Fourthly, collectively agreed work rules may restrict labour utilisation and slow organisational change, thus causing the firm to be less competitive. Finally, certain kinds of bargaining structure may be more prone to inflation, and thereby force governments to run their economies with higher levels of unemployment that would otherwise be necessary.

2- In this scenario the distribution and levels of unemployment where it causes wage differentials to deviate from the levels that would prevail in competitive labour markets. Notable examples among these are the union/non-union differential; policies for particular categories of workers, such as the low paid and young workers; and solidarity wage policies. Compared with individual bargaining in a competitive labour market, collective bargaining over wages enables a group of workers to negotiate a higher wage, the size of the increase and the amount of employment foregone depending on the sensitivity of employers' demand for labour to changes in its price (its elasticity). If the elasticity is low, a relatively large increase in the price of labour will have only a small effect on jobs so that the union will face a favourable trade-off between pay and jobs, than if labour demand is highly elastic. Labour demand will be less elastic, giving a union a more favourable trade-off between pay and jobs, if consumers cannot easily switch to other products; if employers cannot easily substitute other categories of labour or capital; if other categories of workers are in a weak bargaining position because they cannot afford to withhold their labour; and, under some conditions, if the pay of the bargaining group represents only a small proportion of the employer's total pay bill. The first of these depends primarily upon the degree of competition in product markets, discussed later. The second, substitution, may be limited by restrictive employment ...