Union-firm Bargaining Research Articles

Efficiency Wages, Unemployment Benefits and Union-Firm Wage Bargaining

In the economic literature, efficiency wages and union-firm wage bargaining are often treated as two distinct wage formation mechanisms. This paper demonstrates that these two wage factors are not, as a rule, mutually offsetting, but instead mutually reinforcing in setting the wage rate above the market-clearing wage. This point is illustrated by a theoretical model where efficiency wages reduce the adverse effect of rent-sharing because of the higher labour productivity that is associated with higher wages and, therefore, the reduced impact on profits. We test this model on data for economies with different characteristics concerning their bargaining systems. In each case we found consistent evidence of a dominant and prevailing effect of the non-competitive wage formation mechanisms over the competitive ones.JEL: J31, J51, J65.

Efficiency Wages, Unemployment Benefits and Union—Firm Wage Bargaining: The Issue of the Choice of the Outside Option

This paper points out that there may be a logical consistency issue in choosing the reference wage in efficiency wage models. We have shown that defining the outside option in the efficiency wage logic as the market-clearing wage solves this difficulty, and is justifiable in terms of the assumed behaviour of workers and employers. The model that we examine confirms earlier findings of reinforcing effects between union-firm bargaining and efficiency wages. However, if union preferences vary between wages and employment, Summers’ reinforcing effect is no longer present for each value of the parameter describing these preferences. Above a certain threshold value of union preferences for employment, the two mechanisms do not reinforce each other anymore.

Union–firm bargaining: Order of play and efficiency

This paper shows that a modified alternating offers Rubinstein model can provide a Pareto superior outcome in the context of the right-to-manage union–firm bargaining. Two examples of bargaining protocols that yield a superior outcome are provided. In the first example, the parties engage in a game in which the order of play is determined as part of the bargaining. We show that the game has a unique subgame perfect equilibrium in which the firm always moves first in the wage bargaining game. The equilibrium wage is, therefore, unique. In the second example, we examine a two-part-tariff alternating offers bargaining protocol, where the parties bargain over the wage and transfer payments. We show that this bargaining protocol has a Pareto efficient, unique subgame perfect equilibrium. Thus, although the parties do not bargain over the level of employment, the outcome under this protocol is, nevertheless, socially optimal.

Lab Labor: What can Labor Economists Learn from the Lab?

This paper surveys the contributions of laboratory experiments to labor economics. We begin with a discussion of methodological issues: why (and when) is a lab experiment the best approach; how do laboratory experiments compare to field experiments; and what are the main design issues? We then summarize the substantive contributions of laboratory experiments to our understanding of principal-agent interactions, social preferences, union-firm bargaining, arbitration, gender differentials, discrimination, job search, and labor markets more generally.

Union-firm bargaining, managerial delegation and corporate mergers

This article examines how different organisations of union affect the incentives for mergers in a duopoly model with managerial incentives. It is found that when workers are organised in independent unions, the increase in firms' bargaining power will create incentives for the firms to merge; nevertheless, when workers are organised in a single union, whether the firms merge or not, the unions will get the same rents and the firms will have the same profits. Managerial implication and case illustrations were provided by using the cases of China Steel Corporation (CSC) and China Shipbuilding Corporation (CSBC) in Taiwan as the examples to support the model in both theoretical illustrations and managerial strategies.

Strategic militancy and the probability of strikes in union-firm bargaining

The paper provides a model that explains the probability of strikes by the union's use of militancy as a strategic tool in bargaining. Militants are useful because they provide a credible threat, hence enhancing the union's bargaining position. Using a multi-stage bargaining game, we show that, in general, militants will be used by the union as a strategic tool. The strategic benefit of militancy is reflected by the fact that the wage and employment level will be higher in a union that uses militants, compared to a union that does not. We use the model to show that the level of militancy and the probability of a strike decrease with the union's power. This suggests that policies that increase the strength of the union will have, at least, a partial positive effect on social welfare. We also show that the model can be viewed as providing an equilibrium of a repeated game, an interpretation that can explain the probability of strikes even in the absence of militants.

Union–Firm Bargaining, Productivity Improvement and Endogenous Growth

AbstractThis paper presents a growth model with two sectors. In the high‐tech sector, R&D increases productivity and union–firm bargaining determines wages, but in the traditional sector there are neither R&D nor labour unions. The government is able to regulate union bargaining power. The main results are as follows. Because firms try to escape wage increases through the improvement of productivity by R&D, the increase in union bargaining power boosts R&D and growth. It is welfare enhancing to strengthen (weaken) unions when the growth rate is below (above) some critical level. A specific rule is presented for when de‐unionization is socially desirable.

Efficiency wages and union-firm bargaining with private information

We consider efficiency wage effects in a union-firm bargaining model with private information. We show that an increase in the efficiency wage effects does not necessarily increase the wage level at equilibrium, even when the wage bargaining with private information is close to one with complete information. However, if it is commonly known that the firm is stronger than the union and the demand is sufficiently elastic, then an increase in the efficiency wage effects increases for sure the wage at equilibrium.

Labour Market Regulation, Productivity-Improving R&D and Endogenous Growth

We present a growth model in which R&D increases productivity, union-firm bargaining determines the distribution of rents and the government can support unions by labour market regulation. We show that if unions are initially very strong, regulation increases only the workers' profit share and has no impact on employment and growth. Otherwise, regulation increases wages. Because firms try to escape this cost increase through the improvement of productivity by R&D, the economy grows faster. Regulation (deregulation) is desirable when the growth rate is below (above) some critical level.

Friday May Never be the Same Again: Some Results on Work Sharing from Union–Firm Bargaining Models

This paper analyses work–sharing in the union–firm bargaining context. In keeping with mechanisms observed in actual negotiations, we assume that the firm sets employment and we consider bargaining regimes with and without overtime. In models without overtime, work–sharing is consistent with union–firm bargaining provided that income–sharing occurs when the wage rises. In models with overtime, a Pareto–improving cut in the workweek requires wage concession, which is necessary, but not sufficient, for work–sharing. Our models are consistent with a number of well–established stylised facts. In particular, we explain why estimates of the actual hours–standard hours elasticity are always close to unity.

Commodity Taxes, Wage Determination, and Profits

We examine the effects of two different types of commodity taxation, specific and ad valorem, on wages and profits. We analyze two models of wage determination, one with efficiency wage setting and one with union‐firm bargaining. In the former, a (locally) revenue‐neutral shift from specific to ad valorem taxation leads to an increase in both employment and wages and a reduction in profitability. In the latter, the effect on wages and profits may be reversed: predominantly ad valorem taxation raises employment but lowers wages, and under certain circumstances, the net effect is an increase in profits.

Labour Taxation in a Unionised Economy with Home Production

The impact of payroll taxes on unemployment and welfare are examined in a model with household production and union–firm wage bargaining. The analysis shows that unemployment typically falls as the payroll tax rate in the market sector for household substitutes (the service sector) is reduced. This holds even when the payroll tax rate in the non‐service sector is raised in order to maintain a balanced government budget. Welfare improves with a reduced‐service‐sector payroll tax rate only if unions are equally strong and firms are equally labour intensive across the sectors. JEL classification: E24; H21; J22; J51

To be (unionized) or not to be? A case for cost-raising strategies under Cournot oligopoly

This paper analyses the decision by firms under Cournot oligopoly as to recognize unions in order to gain market power despite higher costs. Considering classical models of union–firm bargaining, namely right-to-manage (RTM) and efficient bargaining (EB), we show that, for a sufficiently low level of union power EB firms might adopt cost-raising strategies. This theoretical prediction is compatible with some empirical evidence in favour of EB, and adds to the theoretical finding that EB might dominate RTM under unionized Cournot–Nash oligopoly. It also suggests closer antitrust scrutiny as whether unions can provide cartel-like services to oligopoly firms, allowing them to distort product market competition at the expense of consumers.

Efficiency wages and union–firm bargaining

This paper combines the efficiency wage and union–firm bargaining approaches to wage determination to produce a unified model that leads to higher wages, confirming an original insight of Summers (Am. Econom. Rev. 78 (1988) 383). Increases in monopoly power on the goods market also have a stronger impact on wages when there are efficiency wage effects, but the proportional effect of bargaining and market power on the wage is independent of the proportional effect of efficiency wages. We also find that efficiency wage effects alter the form of the labour demand curve to make it backward bending.

Why do governments subsidise investment and not employment?

The governments of nearly all industrialised countries use subsidies to support the economic development of specific sectors or regions with high rates of unemployment. Conventional economic wisdom would suggest that the most efficient way to support these regions or sectors is to pay employment subsidies. We present evidence showing that capital subsidies are empirically much more important than employment subsidies. We then develop a simple model with unemployment to explain this phenomenon. In our model, unemployment arises due to bargaining between unions and heterogenous firms that differ with respect to their productivity. Union bargaining power raises wage costs and leads to a socially inefficient collapse of low productivity firms and a corresponding job loss. Union–firm bargaining also gives rise to underinvestment. It turns out that an investment subsidy dominates an employment subsidy in terms of welfare if there is bargaining over wages and employment on the firm level. If bargaining is over wages only, results are ambiguous but capital subsidies may still be preferable.

Bargaining on Behalf of a Constituency

We study bargaining situations in which one side consists of a group of people, who elect a representative to bargain with another party on their behalf. A two-phase bargaining model is developed in which a principal-agent problem between the constituency and its representative is embedded. With a natural refinement of sequential equilibrium, we characterize the set of equilibria and examine its efficiency properties. We show that agency problems in the delegation relationship rather than asymmetric information between the two bargainers can cause severe bargaining inefficiency (i.e., delay in reaching agreements). Extensions of the model and applications to union-firm bargaining are then discussed briefly. Journal of Economic Literature Classification Numbers: C78, D82, J52.

Union–Firm Bargaining as a Repeated Game and the Behaviour of Wages over the Business Cycle

This paper studies a repeated game between a union and a firm in the presence of revenue fluctuations. The simple setup, mainly based on Schultz’s (1995) model, gives support to the idea that the existence of a long‐term relationship may change the predictions of the static one‐shot model of wage and employment determination in unionized labour markets. In particular, when revenue is fluctuating and the discount factor is moderate the players can commit themselves to some ‘second best’ strategies, rather than playing non‐cooperative strategies. As a consequence of the enforcement problems a flat wage over the business cycle may arise. This analysis suggests that ‘second best’ strategies allowing for a pro‐cyclical wage as well as for a counter‐cyclical wage are feasible. However, when the discount factor decreases and approaches a certain threshold value the parties cannot do better than play a wage constant over the cycle. Moreover, the resulting wage varies less than the employment level, in accordance with the empirical evidence.

Unions and Profitability over the 1980s: SOME Evidence on Union-Firm Bargaining in the United Kingdom

Unions and Profitability over the 1980s: SOME Evidence on Union-Firm Bargaining in the United Kingdom

UNIONS AND PROFITABILITY OVER THE 1980s: SOME EVIDENCE ON UNION-FIRM BARGAINING IN THE UNITED KINGDOM*

In this paper an attempt is made to assess the behaviour of the rate of return on sales of unionised firms as compared to the non-unionised ones in the late 1980s in the United Kingdom. The main aim is to examine what has happened to the relationship between unionisation and profitability after the changes in the union legislation, competition environment and cyclical variations that took place over this period. The impact of different forms of union-firm bargaining on the union-profitability effect is also examined. The data reveal that the negative union effect on profitability exists, even after controlling for firm specific fixed effects, but that it has been sharply reduced over the 1980s.

Layoffs with Payoffs: A Bargaining Model of Union Wage and Severance Pay Determination

Popular characterizations of union preferences assume that the income of laid-off union members is exogenous. There is evidence, however, of intra-union distribution schemes such as severance payments, unemployment insurance, retraining arrangements and early retirement schemes. This paper develops a model of wage and severance pay determination by a trade union and a firm bargaining in a right-to-manage framework. The important point differentiating the model in this paper from the orthodox union model is that it is efficiency-improving in the sense that it makes full-insurance possible and marginal productivity is equal to the opportunity cost of labour. Moreover, with redundancy pay on the bargaining agenda, both the right-to-manage and the efficient bargaining union models are characterized by the same efficiency conditions. This has implications for empirical research which attempts to distinguish between these two models, since the outcome of both models is the same. Finally, the union-firm bargaining model can also be compared with the outcome of the implicit contract model with redundancy pay. There is an important difference between the two approaches, however. While the result in this paper derives from an imperfectly competitive labour market where unions and firms bargain over wages and redundancy pay, the implicit contract result derives from a perfectly competitive labour market in which competitive forces lead to an efficient outcome.