The Role of Collective Bargaining in Wage Determination

Picture two men negotiating a garment worker’s salary in a Tiruppur factory. On one side sits a single worker who needs the job to pay rent. On the other sits an employer who has ten other applicants waiting outside. That mismatch in power is exactly why trade unions exist, and it’s exactly why collective bargaining has become one of the most debated tools in labour economics. This post breaks down how collective bargaining actually moves wages, and why it matters even more when a single employer dominates a local job market.

What is collective bargaining 🔗

Collective bargaining is the process through which a trade union negotiates wages, working hours, and employment conditions with an employer on behalf of a group of workers, instead of each worker negotiating alone. The International Labour Organization treats it as a fundamental right, rooted in its constitution and reaffirmed in the 1998 Declaration on Fundamental Principles and Rights at Work.

The logic is straightforward. An individual worker has almost no leverage against a large employer. A union representing hundreds or thousands of workers does. It can threaten a strike, control the supply of labour available to the firm, and negotiate as an equal party rather than a supplicant. The ILO notes that bargaining outcomes reached through dialogue tend to be viewed as fairer than terms imposed unilaterally by either side, which is partly why the practice has survived across very different economic systems for over a century.

How trade unions build bargaining power 🔗

Unions don’t raise wages by simply asking nicely. They change the underlying economics of the labour market in three distinct ways.

Restricting the supply of labour 🔗

A union can limit entry into a trade through apprenticeship rules, licensing requirements, or membership conditions. When fewer workers are available at the going wage, the labour supply curve shifts left, and the equilibrium wage rises. This is the classic craft union strategy, historically common in printing, shipping, and skilled trades.

Setting a wage floor 🔗

Instead of restricting supply, a union can simply refuse to let any member work below an agreed minimum. This effectively creates a horizontal wage floor above the competitive equilibrium. Employers who want workers must pay at least that rate.

Shifting the demand curve for labour upward 🔗

This is the least discussed but most sustainable route. Unions can push for better training, improved safety, or productivity-linked bonuses that genuinely raise output per worker. When workers become more productive, employers are willing to pay more because the additional output covers the additional cost. This is a rare case where higher wages and higher employment can move together, rather than trading off against each other.

Wage determination in a competitive labour market 🔗

In a textbook competitive labour market, many employers compete for many workers, and nobody has pricing power. Here, when a union pushes the wage above the competitive equilibrium, standard theory predicts a trade-off: employers cut back on hiring because labour has become more expensive relative to capital or automation. Wages rise for those who keep their jobs, but total employment can fall. This is the standard argument critics use against aggressive union wage demands, and it holds reasonably well when the labour market is genuinely competitive with many small employers.

But most real labour markets, especially in specific towns, specific industries, or specific skill categories, are not perfectly competitive. That is where the picture changes substantially.

The monopsony problem 🔗

A monopsony is a market with only one major buyer of labour, a single dominant employer. Think of a district where one large factory, one mining company, or one hospital network employs most of the available workforce in that trade. In a genuinely competitive market, an employer must pay each worker close to their marginal revenue product, roughly what that worker’s labour actually contributes to output. In a monopsony, the employer does not need to. It can pay below marginal revenue product simply because workers have nowhere else to go.

The U.S. Council of Economic Advisers has described this as a genuine source of labour market inefficiency, arguing that unions act as an important counterweight to an employer’s unilateral wage-setting power. Left unchecked, a monopsonist doesn’t just underpay workers; it also hires fewer of them than a competitive market would, because restricting the workforce is part of how it keeps wages low in the first place.

How unions counteract monopsony power 🔗

This is the part that surprises most students. Under monopsony, a union pushing wages upward does not necessarily reduce employment. It can actually increase both wages and jobs at the same time. Once a union negotiates a wage closer to the marginal revenue product, the monopsonist’s incentive to deliberately under-hire disappears, because it no longer needs to restrict employment to suppress wages. The union effectively forces the market toward the outcome it would have produced if genuine competition existed among employers in the first place.

This is precisely why collective bargaining matters most where it is least discussed: single-industry towns, plantation labour, mining regions, and, increasingly, sectors like healthcare where one large hospital chain or one large gig-economy platform can effectively set the going rate for an entire local workforce.

Collective bargaining in India 🔗

India’s legal framework for unions dates back to the Trade Unions Act, 1926, and was later supplemented by the Industrial Disputes Act, 1947. For decades, these two laws formed the backbone of Indian industrial relations, alongside the constitutional right to form associations under Article 19(1)(c).

In 2019 and 2020, Parliament consolidated 29 central labour laws into four codes covering wages, industrial relations, social security, and occupational safety. The Code on Wages, 2019, was drafted after tripartite consultations between government, employers, and trade unions held between 2015 and 2019, and it establishes a statutory right to minimum wages across both organised and unorganised sectors, something the earlier Minimum Wages Act never fully covered. The Ministry of Labour and Employment lists all four codes on its official portal, and after years of delay, the Industrial Relations Code, 2020, finally came into effect in November 2025.

The Industrial Relations Code also changes how collective bargaining works in practice. Under its provisions, a trade union can register with an employer once it has the support of at least ten percent of workers or 100 workers, whichever is lower. Where multiple unions exist at one workplace, the union representing 51 percent or more of the workforce becomes the sole negotiating union, a significant shift from the earlier, more fragmented system where multiple unions could simultaneously claim a seat at the table.

Challenges facing collective bargaining today 🔗

Despite this legal backing, collective bargaining in India faces real headwinds. The requirement for a single negotiating union can sideline smaller unions representing minority interests within a workplace. The growth of gig work, contract labour, and informal employment has steadily shrunk the share of the workforce that is formally unionised, since platform workers rarely have a clear single employer to bargain against in the first place. And the Industrial Relations Code’s mandatory notice period before a strike limits how quickly unions can escalate a dispute if negotiations stall.

Globally, the trend looks similar. The ILO’s own analysis of bargaining principles emphasises that collective bargaining only functions well when workers’ organisations remain genuinely independent of both employers and government interference. Where union density is falling, that independence and leverage tend to fall along with it.

Why this matters beyond the exam 🔗

Collective bargaining sits at an interesting intersection in microeconomics: it is one of the few areas where a textbook prediction (higher wages mean lower employment) can flip entirely, depending on market structure. In competitive markets, unions do face a real trade-off. In monopsonistic ones, they can correct an existing distortion rather than create a new one. Recognising which market you’re actually looking at, competitive or monopsonistic, is what separates a superficial reading of union power from a genuinely useful one.

What do you think? If a single hospital network or a single large employer dominates hiring in a district, should collective bargaining be treated differently under labour law than it is in a competitive city job market? And as gig work grows, can platform workers realistically organise the same kind of bargaining power that factory unions once had?

References

1. https://libguides.ilo.org/collective-bargaining-en
2. https://www.ilo.org/ilo-helpdesk-questions-and-answers-business-and-collective-bargaining
3. https://obamawhitehouse.archives.gov/sites/default/files/page/files/20161025_monopsony_labor_mrkt_cea.pdf
4. https://www.studysmarter.co.uk/explanations/microeconomics/labour-market/trade-unions-and-wages/
5. https://amlegals.com/trade-unions-and-collective-bargaining-in-india/
6. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2192524&reg=3&lang=2
7. https://labour.gov.in/labour-codes
8. https://www.ibanet.org/India-new-Labour-Codes-recognition-of-trade-unions
9. https://www.ilo.org/media/310956/download