Union Wage Setting Research Articles

Corporate social responsibility in unionised network industries

In a duopoly network industry with decentralised union wage setting, this paper studies the impact of the firms’ engagement in consumer-friendly corporate social responsibility (CSR) on profitability and welfare. It is shown that, regardless of whether the wage setting occurs prior to or after the choice of the CSR levels, being a CSR-type firm rather than a simple profit-maximiser can lead to larger profits and thus higher welfare for their owners/stakeholders. However, the welfare analysis reveals that there is always conflict of interest between the firms’ owners on the one side and consumers, unions, and society on the other side, with respect for the timing of the decision about CSR relative to that of the wage setting.

Cross‐Country Differences in Unemployment: Fiscal Policy, Unions, and Household Preferences in General Equilibrium

AbstractWe develop a five‐period overlapping generations model with individuals who differ by ability and with an imperfect labour market (union wage setting) for individuals of lower ability. The model explains human capital formation, hours worked, and unemployment within one coherent framework. Its predictions match the differences in the unemployment rate across 12 OECD countries remarkably well. A Shapley decomposition of these differences reveals an almost equal role for fiscal policy variables and union preferences. As to fiscal policy, differences in unemployment benefits play a much more important role than tax differences. Differences in households’ taste for leisure are unimportant.

Aggregate demand deficiency, labor unions, and long‐run stagnation

AbstractUsing a money‐in‐the‐utility‐function model, this paper considers long‐run stagnation where insatiable demand for money persistently creates aggregate demand deficiency and consequent unemployment in the presence of nominal wage stickiness attributed to union wage setting. In this long‐run stagnation, generous unemployment benefits reduce unemployment. Moreover, paradoxically, unemployment declines if labor unions give weight to nominal wage gains rather than employment increases.

Should managerial delegation contracts be made before or after union wage setting? A game‐theoretic analysis

This paper analyzes a multiple‐stage game in which, at the final stage, two (managerial) firms compete over quantities in the product market. Prior to this stage, firm‐specific unions set the workers' wages, while the owners of both firms hire managers and provide them with incentive contracts. Owners can freely decide to arrange the managerial contract before or after the (non‐managerial) wage determination stage. Hence, the endogenous choice of the incentive contract stage is derived. The possibility of multiple equilibria arises, where both owners choose managerial contracts before or after unions' wage setting, crucially depending on unions' preferences. Such results also prove to be true for a remarkable degree of asymmetry in preferences over wages vis‐à‐vis employment across unions.

Aggregate Demand Deficiency, Labor Unions, and Long-run Stagnation

Using a money-in-the-utility-function model, we present long-run stagnation where insatiable demand for money secularly causes deficient aggregate demand and thereby unemployment in the presence of nominal wage stickiness attributable to union wage setting. In this long-run stagnation, generous unemployment benefits reduce unemployment. Moreover, paradoxically, unemployment declines if labor unions give more weight to nominal wage gains compared with employment increases.

The Redistribution of Trade Gains When Income Inequality Matters

How does a redistribution of trade gains affect welfare when income inequality matters? To answer this question, we extend the [1] model to unionized labor markets and heterogeneous workers. As redistribution schemes, we consider unemployment benefits that are financed either by a wage tax, a payroll tax or a profit tax. Assuming that welfare declines in income inequality, we find that welfare increases up to a maximum in the case of wage tax funding, while welfare declines weakly (sharply) if a profit tax (payroll tax) is implemented. These effects are caused by the wage tax neutrality (due to union wage setting) and by a profit tax-induced decline in long-term unemployment. As a result, the government’s optimal redistribution scheme is to finance unemployment benefits by a wage tax.

Fairness Considerations in Labor Union Wage Setting – A Theoretical Analysis

AbstractWe consider a theoretical model in which unions not only take the outside option into account, but also care about the performance of the firm and base their wage‐setting decisions on a firm internal reference, called the fairness reference. Two references, which measure the earnings situation of the firm, are considered – productivity and profits per worker. Wage and employment outcomes as well as the degree of wage rigidity depend on the size of the fairness reference relative to the outside option. A high fairness reference leads to wage pressure and real wage rigidity, whereas a low fairness reference leads to wage moderation and real wage flexibility. An increase in the weight on the fairness reference amplifies these deviations from the standard model.

A North-South Trade Model of Offshoring and Unemployment

This paper analyzes a North-South trade model with offshoring and unemployment due to union wage setting. A reduction in the cost of offshoring decreases employment in the North except possibly if there is little offshoring initially. If the scale of Northern firms also falls, then each Northern agent’s welfare declines. Unions have an incentive to reduce their own bargaining power by strategically delegating wage negotiation so as to cushion the negative employment effects.

The Impact of Temporary Agency Work on Trade Union Wage Setting: A Theoretical Analysis

Focusing on the cost-reducing motive behind the use of temporary agency employment, this paper aims at providing a better theoretical understanding of the effects of temporary agency work on the wage-setting process, trade unions' rents, firms' profits and employment. It is shown that trade unions may find it optimal to accept lower wages to prevent firms from using temporary agency workers. Hence, the firms' option to use agency workers may affect wage setting also in those firms that only employ regular workers. However, if firms decide to employ agency workers, trade union wage claims will increase for the (remaining) regular workers. An intensive use of temporary agency workers in high-wage firms may therefore be the cause and not the consequence of the high wage level in those firms. Even though we assume monopoly unions that ascribe the highest possible wagesetting power to the unions, the economic rents of trade unions decline because of the firms' option to use temporary agency work, whereas firms' profits may increase.

Union wage-setting and international trade with footloose capital

This paper sets up a general oligopolistic equilibrium model with two countries that differ in the centralization of union wage-setting. Being interested in the consequences of openness, we show that, in the short run, trade increases welfare and employment in both locations, and it raises income of capital owners as well as workers. In the long run, capital outflows from the country with the more centralized wage-setting generate winners and losers and make the two countries more dissimilar in terms of unemployment or welfare. Decentralization of wage-setting can successfully prevent capital outflow and the export of jobs.

Efficiency wages, staggered wages, and union wage-setting

This article studies the role of staggered efficiency wages in a small-scale DSGE model. The simple structure of the model allows for closed-form solutions. The set-up differs from the related literature in that I assume wages are sticky and unions are responsible for wage-setting. The model has the potential to explain why wages depend strongly on past wage levels as it is suggested by empirical data. The presence of efficiency wages increases persistence, however, only for certain parameter constellations. In particular, the elasticity of effort with respect to the wage has to be large. In an extension of the model I show that this is more likely to be the case if wages are the outcome of a bargaining process between unions and firms.

Labour unions and multi‐product firms in closed and open economies

Abstract This paper sets up a general oligopolistic equilibrium model with multi‐product firms and union wage setting. In this model, we conduct two policy experiments. First, we show that deunionization induces a general decline in firm scale and scope, the respective reduction being more pronounced in non‐unionized industries. Second, we study the consequences of trade liberalization, and show that access to foreign markets lowers firm scope in all industries as well as the scope differential between unionized and non‐unionized firms. Adjustments in firm scale turn out to be less clear‐cut and, inter alia, depend on the degree of product differentiation.

Union Wage Setting and International Trade

This paper sets up a general oligopolistic equilibrium model with two countries that differ in the centralization of union wage setting. Being interested in the consequences of openness, we show that, in the short-run, trade increases welfare and employment in both locations, and it raises income of capital owners as well as workers. In the long run, capital outflows from the country with the more centralized wage setting generate winners and losers and make the two countries more dissimilar in terms of unemployment of welfare. Decentralization of wage setting can successfully prevent capital outflow and the export of jobs.

Fairness Considerations in Labor Union Wage Setting: A Theoretical Analysis

We consider a theoretical model in which unions not only take the outside option into account, but also base their wage-setting decisions on an internal reference, called the fairness reference. Wage and employment outcomes and the shape of the aggregate wagesetting curve depend on the weight and the size of the fairness reference relative to the outside option. If the fairness reference is relatively high compared to the outside option, higher wages and lower employment than in the standard model will prevail. If hit by an adverse technology shock, the economy will then react with a stronger downward adjustment in employment, whereas real wages are more rigid than in the standard model. With a low fairness reference the opposite results are obtained. An increase in the fairness weight amplifies the deviations of wages and employment from those of the standard model. It also leads to an increase in the degree of real wage rigidity if the fairness reference is high and an increase in the degree of real wage flexibility if the fairness reference is low. Thus, higher wages go hand in hand with more pronounced wage stickiness.

WELFARE MEASUREMENT, INVOLUNTARY UNEMPLOYMENT, AND HETEROGENEITY

This paper concerns welfare measurement in an economy with union wage setting, where the equilibrium is characterized by unemployment. Contrary to results derived in the first best, the current value Hamiltonian is not an exact welfare measure in an economy with unemployment. Instead, the welfare measure also depends on “employment effect,” which are caused by the discrepancy between supply and demand in the labor market. In addition, since unemployment gives rise to heterogeneity, distributional effects will also characterize the welfare measure.

FISCAL POLICY AND ECONOMIC GROWTH IN THE IMPERFECT LABOR MARKET

Using a simple overlapping generations model with the growth engine of public capital by incorporating the union wage setting, we examine the effects of fiscal policies on unemployment, economic growth and welfare in the imperfect labor market. We demonstrate that the growth-maximizing tax in the imperfect labor market is larger than that of the perfect labor market. However, as the allocation ratio of public capital increases, the growth-maximizing tax in the imperfect labor market approaches that of the perfect labor market, thus reducing the unemployment rate. The policy implications of the intergenerational welfare aspects are also mentioned.

Macroeconomic shocks, unionized labour markets and central bank disclosure policy: How beneficial is increased transparency?

The paper investigates the implications of disclosure by the central bank to the private sector of information relating to the current realizations of macroeconomic disturbances. In the context of an economy in which the goods market is monopolistically competitive and where wages are set by atomistic unions, we find that greater precision of information provided to wage setters in respect of supply shocks has ambiguous welfare effects, both from the perspective of the social loss function and from the viewpoint of unions who act on the information. An important feature of the model is an externality in union wage setting which implies the outcome of the wage determination process is collectively inefficient.

The Impact of Trade on Employment, Welfare, and Income Distribution in Unionized General Oligopolistic Equilibrium

This paper sets up a general oligopolistic equilibrium model with unionized labor markets. By accounting for productivity differences, the model features profit and wage differentials across industries. We use this setting to study the impact of trade liberalization on employment, welfare, and the distribution of income. In particular, we show that a movement from autarky to free trade with a symmetric partner country lowers union wage claims and therefore stimulates employment and raises welfare. Whether firms can extract a larger share of rents in the open economy depends on the competitive environment as well as on the degree of centralization in union wage setting. Finally, the distribution of profit income across firm owners remains unaffected, while the distribution of wage income becomes more equal when a country opens up to trade.

Union wage setting in a dual labour market: the role of centralisation

This paper analyses the centralisation of union wage bargaining when the workers’ outside option is determined endogenously. A dual labour market model is developed where the wage rate in the first sector is either the result of decentralised bargaining at the firm level or of centralised bargaining at the sector level. Workers’ outside option is employment in a competitive sector. Labour market outcome depends on whether the union takes into account the connection between wages in both sectors. Wage setting centralisation increases social welfare if union's bargaining power at the firm level is relatively high and/or the union at the sector level represents a relatively large number of workers.

Unemployment dynamics in an OLG economy with public pensions

Pension benefits in old age establish a disincentive to save in youth, thereby yielding lower levels of capital stock and the wage rate. As a result, the trade union has an incentive to change the composition of its two targets: employment and the wage rate. This paper develops a model that includes employment effects of public pensions via capital accumulation and union wage setting. Within this framework, we consider how contribution rates to the pension system influence the level and time path of the unemployment rate. It is demonstrated that (1) a higher contribution rate results in a lower unemployment rate, and (2) the economy with a high (low) contribution rate experiences monotone convergence towards (oscillatory convergence towards or a period-2 cycle around) the steady state.