TRADE UNIONS, WAGES AND UNEMPLOYMENT: WHAT CAN SIMPLE MODELS TELL US? *

Abstract

THIS paper examines the economic theory of an economy in which there are trade unions. The paper does this in the obvious way: it combines a microeconomic model of trade union behaviour with some elementary general equilibrium models of the whole economy.' A number of new ideas are suggested. In addition, the paper presents, within one overall framework, a number of results which have been known for some time. In the first of its five main sections the paper studies how wages, employment, output and welfare are determined in simple one and twosector models. The second section suggests that there is a short-run Phillips curve in an elementary type of unionised economy, and also that there is the equivalent of a natural rate of unemployment and a vertical long-run Phillips curve. The third section examines one way in which a government can affect this equilibrium rate of unemployment: it is shown that, under certain assumptions, a rise in the level of unemployment benefit will raise the equilibrium rate of unemployment. This is proved for various financing schemes. The paper's fourth section shows that, when quantity rationing occurs, a unionised economy behaves quite differently from a traditional neoclassical economy. The fifth section attempts to explain a stylised fact in labour economics, and the paper ends with a summary and conclusion.