In our Main Guide to Wage Differentials, we introduced the core forces of supply and demand in the labour market. Since then, we have explored how wages are really determined in imperfect labour markets.
We examined how firms decide pay in What Is My Labour Worth? We then examined how supply drives superstar earnings. This was detailed in Ronaldo and Messi: The Economics of Why Superstars Earn Astronomical Wages. We also looked at why inequality persists in Why Does the Gender Pay Gap Still Exist?
However, the real world gets even messier. Sometimes, a single employer dominates the market. This employer can dictate wages (Monopsony). In other cases, workers band together to push back. They negotiate better conditions (Trade Unions).
So, do Trade Unions actually help workers, or do they simply create unemployment? In 2026, the UK will implement its “biggest upgrade to workers’ rights in a generation.” The answer depends entirely on the structure of the labour market. Let’s break it down.
What Is a Monopsony in the Labour Market?
The Answer: One buyer, many sellers.
A monopsony exists when there is only one dominant employer in a labour market. Think of the NHS employing nurses in a local area, or a large Amazon warehouse in a small town.
As this employer is the only significant buyer of labour, they become a “wage maker” rather than a wage taker. Workers have few alternative employers, so the firm has considerable power to set pay.
To hire one extra worker, the monopsonist often has to raise the wage not just for that worker. They must raise it for all existing employees. This means the firm’s Marginal Cost of Labour (MCL) lies above the Average Cost of Labour (ACL).
To maximise profit, the monopsonist hires where MCL = MRP (Marginal Revenue Product). The result is:
- Lower wages than in a competitive market
- Lower employment than in a competitive market
In economic terms, this outcome is known as labour exploitation. Workers are paid less than the value of what they produce. The wage is less than the marginal revenue product (Wage < MRP).
How Do Trade Unions Change the Game?
The Answer: Countervailing power.
A Trade Union acts as a monopoly supplier of labour. Instead of workers negotiating individually, the union uses collective bargaining to negotiate wages and conditions on behalf of all members.
What happens next depends on the type of labour market.
In a Competitive Labour Market
If a union pushes wages above the equilibrium level, firms reduce the quantity of labour they demand. The result is classical unemployment (an excess supply of labour). More workers want jobs than firms are willing to hire at the higher wage.
In a Monopsony
The outcome is very different. In a monopsony, a union can actually increase both wages and employment at the same time.
The union negotiates a minimum union wage. This action flattens the firm’s MCL curve. It removes the employer’s incentive to restrict hiring. Employment rises toward the competitive level, while wages also increase.
Economists call this situation a Bilateral Monopoly – a market with a powerful buyer, the monopsonist. This buyer faces a powerful seller, the union. The final wage depends on bargaining strength.
In this case, trade unions can reduce exploitation and improve efficiency at the same time.
Are Trade Unions Still Relevant in 2026?
The Answer: More than ever.
Although union membership declined for decades, the labour market is changing rapidly.
1. The Employment Rights Act 2025
As we move through 2026, new legislation has strengthened union access rights and protections for union representatives. Many describe this as the UK’s biggest upgrade to workers’ rights in a generation. It increases unions’ ability to organise and bargain effectively.
2. The Gig Economy
Workers for delivery platforms and ride-sharing apps are increasingly unionising to challenge their classification as “independent contractors.” They are fighting for legal recognition as “workers” with minimum pay and employment rights.
3. Public Sector Monopsonies
In sectors where the government is the main or sole employer, monopsony power remains strong. This is particularly true in healthcare, education and rail. In these markets, trade unions continue to be the primary tool for improving pay, staffing levels and working conditions.
Summary for Students
- Monopsony: Leads to exploitation where Wage < MRP, with lower wages and employment than in competitive markets.
- Trade Unions: Can act as countervailing power, potentially raising both wages and employment in monopsonistic markets.
- Classical Unemployment: Occurs only when unions push wages above equilibrium in markets that were already competitive.
Understanding monopsony and trade unions is essential for analysing real-world labour markets. This topic is a core part of A-Level and GCSE Economics exams.
Leave a comment