Establishment of a strong trade union introduces an element of monopoly in the labour market. Now. instead of each worker negotiating with the employer on the question of wages. the trade union bargains on behalf of them all. Here is a case of bilateral monopoly.
Hence. determination of wages by collective bargaining is like determination of price under bilateral monopoly. ·The following diagram (Fig. 32.5) illustrates the determination of wage under collective bargaining on the- assumption that the trade union seeks to achieve maximum wage regardless of its effect on employment. In this figure ARP is the average net revenue productivity curve and MRP is the marginal net revenue productivity curve and  le4 and Ie5 arc indifference curves showing different wage levels corresponding to the satisfaction of the trade union with the respective wage rate. The indifference curves show If the union had its way and could choose the wage rate unilaterally. it would choose that wage rate at which the corresponding indifference curve is a tangent to the average net revenue productivity curve (ARP). This happens at the point P in the figure given above and the wage rate will be set at OW4 (= PM). where the indifference curve Ie4 is tangent to ARP curve. The number of workers employed will be OM. A wage rate above OW being above the average net revenue productivity will put the employer to loss and hence will not be at all acceptable to him. He would rather stop production which would be detrimental to the workers who would lose their jobs. Thus. OW4 is the upper limit. But the employer would like to fix wages at as Iowa level as he could considering industrial conditions. elasticity of demand for the product. elasticity of substitution between labour and capital. prevailing wage rates. labour efficiency. their cost of living. etc.

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