Trade Unions

Explain analytically how trade unions can influence firm performance. How best should employers deal with trade unions?

‘A trade union is an organization made up of members and its membership must be made up mainly of workers. One of its aims is to protect the interests of its members in the workplace.’ (nidirect, 2012) Trade union exists due to their capability to negotiate for better working conditions for individual workers. Some examples of trade unions in the U.K. would be, General Federation of Trade Unions, Trade Unions Congress and the Scottish Trades Unions Congress. In recent years, there have been many debates about the influence of trade unions on firm performance. This paper discusses the effects of trade unions on firm performance and how employers should deal with these trade unions.

One of the most commonly known effects of unions is their ability to increase wages for their members, which has a negative effect on firm profitability. With trade unions active in the workplace, the norms of firms’ changes significantly, employers cannot negotiate with employees directly, all discussions including working conditions must be discussed through between the union and the employer. Moreover, trade unions redistributes wealth between employees, the union does not allow employees to be paid on the their level of performance within the firm nor their individual ability. The wage level remains the same regardless of how much one has contributed to the firm (Card, 1996). Hence, unionized firms are at the risk of employing the best employees, as the better-qualified employees are more likely to refuse to work under a union contract where their wage level is capped (Abowd & Farber, 1982). In addition, studies have shown that unionized firms’ profitability is 10 to 15 percent lower than the non-unionized firms (Hirsch, 1991). The unions affect different firms differently, for example, if firms operate in competitive markets, trade unions would have little...