Trade unions and optimal labour contracts

Abstract

The recently revived literature on wage and employment determination under trade unionism, has, in our opinion, contributed important insights into the functioning of especially European labour markets. It suffers, however, from a potentially serious deficiency: with a few exceptions it neglects completely the issue of risk-shifting between workers and employers.3 In particular, it disregards entirely the possibility of such risk-shifting in economies characterized by more or less encompassing trade unions and centralized wage setting, as e.g. the Scandinavian countries, the Netherlands and Austria. A typical feature of trade unions in these countries is that they are not only concerned with wage setting, but strive in various ways to increase their member’s welfare at the expense of the employers, by reducing their members’ exposure to risk. For instance, unions demand limits to the employers’ right to require overtime or co lay off workers, or they demand occupational safety rules, work injury insurance, health insurance, etc. An actual employment contract hence not only entitles the worker to a certain wage and the employer to a certain number of working ho urs in return, but is really a package of rights and responsibilities for both parties. Increases in the amount of insurance such a package provides are sometimes explicitly declared to be obtained through foregone wage increases. While risk-shifting hence is of prime importance to real world unions, the formal trade union literature is almost entirely concerned with wage and employment setting under certainty.