Unions: Wage floors, seniority rules, and unemployment duration

Abstract

This paper examines the impact of unions on unemployment and wages in a dynamic equilibrium search model. We model a union as imposing a minimum wage and rationing jobs to ensure that the union's most senior members are employed. This generates rest unemployment, where following a downturn in their labor market, unionized workers are willing to wait for jobs to reappear rather than search for a new labor market. We characterize the hazard rate of exiting unemployment, and show that it is low at long durations whenever the union-imposed minimum wage is high; we establish that a high union-imposed minimum wage generates a compressed wage distribution and a high turnover rate of jobs — properties consistent with the data. Finally, we show that seniority rules lead to lower unemployment levels, relative to an alternative rule allocating jobs to workers randomly.