Labour market is where individuals seeking employment interact with employers who want to obtain the most appropriate labour skills for their production process. Labour markets are significantly affected when wages rise, as they create an increase in unemployment or an increase in employment or have no effect at all, causing economic growth.
When wage rates increase, it increases the quantity of labour supplied, as firms can no longer afford to pay all its employees the increased rate, therefore employers need to make a decision in dismissing some employees. This is because firms need to accommodate to the higher costs of paying employees a higher wage. This can lead to higher unemployment levels, as too many wage increases will result in higher cost within businesses that don't change their employees' structures. This is represented in the graph below.
Unions play an important role in the labour market. When unions use their bargaining strength, it can force employers into paying a higher wage rate than market forces would normally dictate.
When there is a higher wage rate, the quantity of labour supplied will exceed the quantity of labour demanded and employment will be less than the original equilibrium quantity, which causes unemployment. Therefore unions must make a decision in picking between achieving a higher wage rate and maintaining current levels of employment, as shown in the diagram on the following page.
Unions have been much more successful in negotiating wage increases than employer groups have been in persuading wage rises. However, the actions of employers have benefited employers and employees. This is because, through lobbying the government for protection from foreign competition or for industry assistance, employer associations, they have been able to secure for Australian produces a larger share of the domestic market for their output.
As shown in the diagram...