Economic Impact Of Unions On Wages Commerce Essay

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The industrial development on the western lines in the middle of the 19th century brought the formation of trade unions in the Indian industry. The first trade union formed in India was Madras Labour Union in the year 1918. Since then large number of unions were formed in almost all the industries of India. The trade unions are basically formed to protect the employee's interests. The trade union is the need of the today's world. For example, in an organization having hierarchical structure, it is very difficult to convey the employee's needs to the management of the company. It requires the group of employees who can discuss and negotiate the needs and issues of all the employees. Unions are basically labour cartels. They work in the same way like OPEC (Organization of Petroleum Exporting Countries) who reduces the supply of oil to increase the price of it. The cartels also reduce the supply so that the consumers will have to pay higher prices for its products and services. This paper talks about the positive and negative effects of trade unions on various aspects like wages, business, employment, benefits, working conditions, productivity and relationships. The research has also revealed that the unions harm the economy because many unionised industries have collapsed in the past. The research also says that the unions help their members but hurt consumers with respect to its cost. Unionizing changes the workplace. Employers are able to negotiate only with the union committee representatives and all discussions on wages, work culture, benefits; etc takes place between employer and union. In this way, the employer is prohibited from taking any decision without discussing it with union members.

Effects on wages

The most important component of job is the pay. The fundamental advantage of forming trade unions is the higher wages, shorter working hours and more benefits. It is believed that the unionized employees get the higher salary than the non-unionized employees. For example, after four months protests by the Maruti Suzuki workers union at its manesar plant over the differences in wages, the workers got hiked in the salaries by an average 75%. The company also introduced a monthly travelling allowance of Rs 1200 for each worker. It also introduced a 20,000 interest free loan for its employees. Imagine that GM, Tata Motor, Maruti Suzuki and Mahindra and Mahindra companies of automobile industry forms the cartel. They decide to increase the prices of their vehicles by Rs 1, 00,000. This would have a negative impact on the consumers and the economy as fewer consumers will buy these vehicles and hence these companies would produce fewer vehicles but the increase in price would increase this company's profits. In today's world, the competition in the market has increased and hence they cannot pass on the higher prices to the consumers, instead cartels benefit from it by getting wage hike. Consider a company investing in machines having more productivity. This requires more investment but it reaps the benefits in the form of profits in the future. Hence, workers' output increases and leads to increase in profits. The company will have advantage over its competitors that did not make the same investment. Unions redistribute the abnormal profit earned from the investment to its members hence the company is unable to capitalize on the abnormal profits and give the benefits to its shareholders.

Effect on businesses and productivity

The hike in wages comes from the companies businesses. The wage hike affects the sales and profits of the organization. The organization would be left with no choice and hence it raises the prices of its products and services. This can even lead to the loss of customers and losing the market share in its industry. The research also says that the organization having trade union is less profitable than the non-unionized organization. Also, the shareholders' returns get affected because of fall in profits and less investments. The research says that the shareholders are keener to invest in non-unionized companies than the unionized companies as union members would restrict its company to expand in the market or allow them to make more investments. Again, in the case of Maruti Suzuki, when the management of the company agreed to give an increase in the salary by an average of 75%, it impacted the profits by 2-3% in that quarter. Its shares on BSE and NSE fell by around 5%. This also led to the delay in its production of four- wheeler vehicles and the loss of around 50 crores daily. Another example where business has got drastically affected due to trade union is Kingfisher Airlines. KFA was having second highest market share in aviation industry of India before the management and trade union problem had hit the company. When KFA was unable to pay its employees due to huge debt, the trade union opposed the management and went on strike for a long time. This affected the market share and business in such a way that the company was about to be grounded forever.

Effect on employment

Labour cartel often leads to job losses in order to raise the wages of its members. If the hike is not given to its members then trade union and its members go on strike and it doesn't allow its organizations to hire new employees. The situation might get worse if the industry is facing recession and the organizations need more workers to recover the losses and be stable during this period. It is difficult for the organizations to come out of recession by encouraging trade union. Consider the example of Kingfisher Airlines which was a dream company for any person to be part of it. Before the crisis of KFA, employees were working with the full capacity. When the workers were not paid the salary, the trade unions went on strike and stopped working for KFA. This led to cut down in its operations as it had no employees to work for the operation. As the cartel is producing fewer vehicles, few employees are needed for it and hence it generates unemployment in the economy and hurts the economy's growth badly. Unionized companies avoid hiring underperformer workers as if they get into the company then union members makes it difficult for employer to fire underperformer workers. It is very difficult for even the union members to quit the job as he might not get the same salary or the position in other company. Consider the company in the automobile industry that is unable to invest more in the fuel efficient vehicles. Hence they would switch to lower category of the vehicles. This affect its competition in the marketplace and this leads to job cuts in the company.


If the organization is able to provide better wages and benefits to its workers then it might not face any problem related to the trade union. Treating workers with respect and dignity could win the trust of the workers and they may not pose any problem to the organization. If the workers are provided with better working conditions and safe environment to work then the employees may be motivated to work and may not leave the job or join the trade union. Giving benefits and bonuses on regular basis is one of the ways to keep the employees in the organization for a longer time. No research has proved that the trade union has contributed to more revenues and profits. Only employees benefits from it. The companies with high labour cost go out of business. It has always retarded the growth of an economy and not helped the economy to come out of recession. The Indian Government should come up with anti- union laws which prevents from union committee to be formed and rule the company. Labour cartels are the main culprits for less investment in the country, less job creation and hence it affects the growth of the country. A law should also be made to see that the company pays good salary to its workers and provides them with better working environment and benefits. If this happens then no employee would be willing to form a union and create problems for the company and also the economy. The foreign companies should be allowed to enter the country if they agree to invest minimum amount in the country and generate employment with minimum wages.