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The paper mainly discusses the relationship between trade union and wage disparity, and the mechanism of collective bargaining in reducing income inequality. The income distribution inequality is a critical problem confronting China's economic reform, for which the reform of primary distribution is important. The experiences of the advanced countries reducing income inequality through collective bargaining can be introduced to China. Firstly, through the historical data of union density and membership and the summary of past researches, the paper points out that the trade union experienced an inverse U shape development in the past century in US and UK. The government regulated union's behaviour and its relations with firms through legislation and policy. The market-oriented labour relation regulation system is what China's reform should aim to achieve. Secondly, the change of union power affects the collective bargaining result. Taking organization development, objective standards and worker unity into consideration, trade unions choose the standardized wage rate strategy in the wage bargaining in order to absorb more members and keep the union size. The standardized wage rate includes job wage rate and seniority automation rate with maximum. Thirdly, under such strategy, the union density varies inversely with extent of inequality. This paper uses the ratio of 9th to 1st deciles and 5th to 1st deciles to represent wage dispersion, and Gini Coefficient to represent income inequality. With the withering of trade unions of US and UK in 1970s and 1980s, the income disparity increases on the contrary. Also, a large number of studies have approved the positive effects of trade unions on reducing wage dispersion. Fourthly, such effects are derived from the squeezing effect of standardized wage rate and the threatening effect of unions. The mechanism is increasing wage rate of low income level and narrowing wage distribution through gathering more workers at the same job wage rate level. Finally, there are some problems in China regarding trade unions, such as low coverage rate of collective contracts, non-institutionalized collective negotiation, direct interferences of government. It is necessary to emphasize the influence of collective negotiation in the primary distribution to deal with the income inequality problem in China. There are few Chinese research papers discussing about the trade union and income inequality from a historical view. US and UK are two of the most advanced market economy entities, hence China can learn from their experiences to deepen economic reform and to improve income quality. This paper firstly presents a tendency based on the historical data, then attempts to explain the reasons behind the tendency, and validate the argument with empirical research. The paper also has some shortcomings. The first is the missing of the early 20-century data. The second is that the economic and political environment for legislations and policies which have changed the union power is not well explored. Finally, there is a lack of micro data about China's collective negotiation and wage disparity. [ABSTRACT FROM AUTHOR]