Union-backed wage increases - A conundrum

Sunday, August 18, 2013

Recently, I’ve come across a very interesting conundrum at my place of work, which shall remain nameless so as to avoid reprisal from company social networking rules (although my intention isn’t to attack them).

I came into work one evening to find an advert to encourage union members to vote in a proposed pay rise that is backed by the union. Now, although the pay rise isn’t a significant amount, at an additional 14 pence per hour on top of their current hourly rate, my mind went on to contemplate the potential ramifications of this likely action, and the mind-set of those who are so eager to vote for this rise.

 

In the case of any pay rise (that isn’t solely decided on by the company itself or through market forces), there is often a dangerous outcome. Firstly and least damaging to the company is the potential for the company to be able to take on less staff as it now costs them more than it did before. Let’s remember that although a rise of 14 pence per hour per employee isn’t a huge amount, when you think about how much extra that will cost a company that has thousands upon thousands of employees, then things start becoming rather costly. This rise in pay when it comes in a national scale increases unemployment and makes it more difficult for the young and unskilled to find employment. Fortunately however, this is an unlikely outcome in this particular case.

The next potential outcome is a rise in the price of the product. This is therefore damaging to the customer who now has to pay for the higher cost of labour. Now, depending on the increase, this can either lead to a continued level of profit, or the more likely outcome, a decrease, due to the fact that customers don’t want to pay the higher costs and will move to a competitor. Ultimately, this could lead to workers being made redundant due to the reduced profits.

The other possibility, although very unlikely in this case (more so in the case of a rise in national minimum wage), is that the company will immediately have to make redundancies in order to survive. These rises are often the most damaging to the small businesses and employers who can’t survive the huge increase in their costs. There is even the possibility that the company won’t be able to survive and will collapse as a result; a further increase in unemployment no doubt. This ultimately means that this type of wage government, rather than a market led approach, is more damaging to the worker than it is a benefit.

I believe the mentality that people who strive for wage increases such as these to go for the carrot on a string approach. They see the extra money that they will be earning (likely a very small amount that won’t make any difference to them), without thinking about the potential cost to their company, fellow employees and those that want a job. 

The conclusion I draw from this is that government- or union-led wage increases are almost always far more damaging than they are beneficial; and we should always think about the potential ramifications to businesses and workers before we celebrate the extra money we’ll be getting.

By Daniel Harding

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