The decline or expansion of unions: a bargaining model with heterogeneous labor

Abstract

This paper studies labor demand and supply interactions between two sectors, one (nonunion) sector with worker–firm bargaining, and one (union) sector with a common wage for all workers, and how the two sectors evolve over time in response to exogenous productivity shocks. Workers' productivities differ and cannot be observed by firms prior to hiring. With identical non-wage costs in the two sectors, equilibria exist with both sectors present. With great upper-tail productivity dispersion there exist two equilibria, one with only union firms and the other with only nonunion firms. When union firms have lower (monitoring and bargaining) costs, both types of firms may coexist and union firms attract all low-productivity workers. A greater union share then improves efficiency and leads to less nonunion-sector wage dispersion. The model helps in understanding recent international wage and employment patterns, such as why some countries have strong and stable unions and small and stable wage dispersions, while other countries have weak and vanishing unions and increasing wage dispersions.