Trade Unions and Wage Inflation
Inflation occurs when the general price level increases continuously. It is therefore a monetary phenomenon, and some economists argue that its origins are monetary also. Prior to the so-called ‘Keynesian revolution’ this was the consensus view, and it held that the supply of money determined the general level of prices. On the assumption of a perfectly competitive labour market, neoclassical theory predicted that money wages adjust to the predetermined price level so as to produce the real wage which equates the supply of and the demand for labour. Keynesian theory, employing different behavioural assumptions, predicts that the general price level and the rate of unemployment are determined by the interaction of the monetary and the real sectors; a key assumption in deriving this prediction is that money wages do not adapt passively to the level indicated by the perfect-competition model, which is an unsuitable theoretical basis for analysing the operation of labour markets. Employers usually possess bargaining advantages when negotiating with individual workmen and so enjoy some degree of control over wage determination. Workers respond by organising trade unions to offset the employers’ power through collective action. Neither the employer-dominated unorganised market nor the subsequent development of bargaining institutions resembles the model of perfect competition.
KeywordsLabour Market Trade Union Living Standard Money Supply Real Income
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