Unionized Oligopoly Research Articles

Taxes, social insurance contributions, and undeclared labour in unionized oligopoly

This paper studies the phenomenon of undeclared labour. In a unionized duopoly with decentralized wage setting and proportional taxation we show that a trade-off exists for employers between contributing to social insurance for their employees and incurring taxes on labour. The configuration among the tax and social insurance contribution rates may thus generate undeclared labour in equilibrium. Nonetheless, those rates can be handled by a social planner so as to tackle undeclared labour at no cost to social welfare, but with welfare distributive consequences.

A two-period unionized mixed oligopoly model: public–private wage differentials and “Eurosclerosis” reconsidered

In the context of a two-period unionized mixed oligopoly, we propose that—due to the public sector’s role in the market—public–private wage differentials in favor of the public sector employees emerge over the business cycle, under either an asymmetric or a symmetric firing restrictions regime across the public and the private sector. Under the former regime, firing costs are higher than (equal to) hiring costs in the public (private) sector, while under the latter regime firing/hiring costs are equal everywhere. The structure of the emerging product and labor market equilibria, as well as the volume and the distribution of welfare, are however quite different under the two regimes. In contrast to conventional beliefs, the asymmetric regime, as compared to the symmetric regime, entails higher aggregate output and employment over the business cycle. Moreover, a typical measure of social welfare dictates that the asymmetric regime should be sustained unless demand conditions significantly deteriorate during the recession.

Flexibility in Wage Setting Under the Threat of Relocation

AbstractRelocation of production to countries with low labour costs has induced increased labour market flexibility, which has been praised as a silver bullet for economic growth and low unemployment. Within a unionised oligopoly framework, in which a multinational firm has the option to relocate its production to a foreign country, we analyse the welfare implications of both centralised and flexible wage‐setting regimes. For very low foreign wages, wage flexibility leads to higher welfare than a rigid centralised regime. In contrast, for ‘intermediate’ wage levels in the foreign country, an industry‐wide uniform wage leads to higher social welfare than flexible wages.

We Want Them All Covered! Collective Bargaining and Firm Heterogeneity: Theory and Evidence from Germany

AbstractThis article establishes a link between the degree of productivity dispersion within an industry and collective bargaining coverage of the firms in the industry. In a stylized unionized oligopoly model, we show that differences in productivity levels can affect the design of collective wage contracts a sector‐union offers to heterogeneous firms. Using German linked employer–employee data, we test a range of our theoretical hypotheses and find empirical support for them. The dispersion of sector‐level labour productivity decreases the likelihood of firms being covered by a collective bargaining agreement on the industry level, but increases the likelihood of firms being covered by firm‐level agreements. The results hold for different subsamples and (panel) estimation techniques.

Preemptive Mergers in a Vertically Differentiated Unionized Oligopoly

In the context of an international unionized oligopoly with vertical differentiation, the pattern of mergers is investigated. We show that mergers between firms producing the same-quality good lead wages to the reservation level, as well as maximize industry profits. However, it turns out that most of the market structure equilibria are shaped by mergers between producers of differentiated and homogeneous goods. This is so because mergers increase the market share of participating firms at the expense of that of the outsiders, leading to a scenario of preemptive mergers, where the main driving force can be to preempt rival mergers. Finally, it is shown that if three-firm mergers are not allowed, the strategic behavior of firms is eliminated, mergers between same-quality producers occur and social welfare is maximized.

Transnational Union Cooperation in the European Metal Sector: Reinforcing and Obstructing Factors

The literature on unionized oligopoly has demonstrated that unions will generally benefit from cooperation. Despite these benefits, most initiatives towards Europeanization of collective bargaining have been unsuccessful. Some notable exceptions can be found in the European metal industry. The European Metalworkers Federation can claim several path-breaking precedents of cross-border coordination, and is being monitored closely by scholars of European industrial relations. Despite this abundant attention, the reasons for success or failure have not been analyzed analytically.In this paper, we present a model that takes specific characteristics of the metal industry into account, such as product differentiation, imports from low-wage countries and differences in reservation wages. We predict that cooperation will be easier when reservation wages are similar and when imports are imperfect substitutes. In contrast to the common truth that an external threat encourages cooperation, we find that under specific circumstances unions will be less eager to cooperate when faced with a foreign competitor. Our predictions are in line with the various levels of transnational cooperation in the automobile, electrical equipment and steel industries. Furthermore, our results indicate that the opposition of firms and the reluctancy of the European Commission to support transnational bargaining are generally justified by predicted changes in profits and overall welfare.

Decentralized union-oligopoly bargaining when wages signal strength

This paper analyzes decentralized wage bargaining in a unionized oligopoly industry. The novel features of the proposed model are that firms are subject to incomplete information concerning their cost and that wages may signal firms’ private information. The potential for signaling exerts an upward shift on the equilibrium wage profile which mitigates the externality that has been shown to weaken unions’ bargaining power in decentralized wage bargaining.

International and National R&D Networks in Unionized Oligopoly

AbstractWe study the endogenous formation of R&D networks between two domestic and one foreign firms in a unionized oligopoly. We find that the equilibrium networks are sensitive to the extent of knowledge spillovers between networked firms. If spillovers are sufficiently low, the complete network will arise in equilibrium; however, if spillovers are sufficiently high, the foreign partial network that includes a domestic and a foreign firm will arise. Moreover, for intermediate spillovers, no equilibrium network emerges. These results have implications for aggregate outcomes: equilibrium networks are not necessarily optimal in terms of aggregate effective R&D and aggregate firm profits.

WAGE BARGAINING AND MERGER INCENTIVES WITH ASYMMETRIC COSTS

ABSTRACTThis paper examines how wage bargaining within each firm influences the relationship between an equilibrium ownership structure and the most preferred ownership structure from the viewpoint of social welfare, in a unionized oligopoly of asymmetric firms with respect to productivity of capital. We consider the merger incentive of each firm’s owner when the wage level is determined through bargaining between the firm’s owner and union. We derive a condition for both the degree of cost asymmetry among existing firms and the relative bargaining power of each firm’s owner to her/his union such that each ownership structure can be observed in equilibrium. We also show that although the two types of ownership structures with the merger involving the least efficient firm can be equilibria and socially optimal, these structures are observed only when both the degree of cost asymmetry and the relative bargaining power of each firm’s owner are moderate. Finally, we analyse the relationship among the cooperative game approach employed in this paper and two non‐cooperative merger formation approaches, and examine the robustness of the results obtained in this paper against the change in the assumption regarding each firm’s cost function.

Strategic investment and international outsourcing in unionised oligopoly

We develop an oligopoly model in which firms facing unionised domestic labour markets choose between producing an intermediate good in-house and outsourcing it to a non-unionised foreign supplier that makes a relationship-specific investment in developing the intermediate. The paper sheds light on the issue of whether international outsourcing offers a means to ‘escape’ the power of domestic unions and on the existence of intra-industry wage dispersion. We show that outsourcing typically increases marginal costs even when it lowers union wages. Despite this, more powerful unions increase the incentive to outsource.

Corrigendum to “The strategic choice of union-oligopoly bargaining agenda” [Int. J. Ind. Organ. 17 (1999) 1029–1040

Assuming Cournot competition, Bughin (1999, 'The strategic choice of union-oligopoly bargaining agenda', International Journal of Industrial Organization) states that in a unionized oligopoly with firm specific negotiations, Efficient Bargaining (EB) is always the industry equilibrium both under blockaded and non-blockaded market structures. Extending Bughin's (1999) framework to a conjectural variation model, this note shows that EB emerges as equilibrium only for entry deterrence reasons. In all other cases, conflict of interests among the bargaining parties arise due todifference in dominant strategies, whatever is the degree of competitiveness of the industry.

Product and Labor Market Deregulation in Unionized Oligopoly with Asymmetric Countries

This paper sets up a general oligopolistic equilibrium trade model for two integrated countries that are similar in all respects except of the prevailing labor market institutions. In one country, the labor market is perfectly competitive, while in the other country labor unions are active in a subset of industries. The differences in labor market institutions are a source of comparative advantage, which crucially impact inter-industry trade and welfare in the open economy. In this setting, we study the trade and welfare implications of labor market deregulation and compare these implications with the consequences of product market deregulation. Thereby, we take into account that labor market reforms are subject to national policy decisions and thus associated with unilateral intervention, while product market deregulation is determined at an international – for instance European – level and thus associated with coordinated intervention in both economies. As a key result, we find that both forms of policy intervention generate a conflict of interest between the two trading partners and that welfare losses materialize for the country with the competitive labor market regime whenever global gains are realized.

Strategic Investment and International Outsourcing in Unionised Oligopoly

We develop an oligopoly model in which firms facing unionised domestic labor markets choose between producing an intermediate good in-house and outsourcing it to a nonunionised foreign supplier that makes a relationship-specific investment in developing the intermediate. The paper sheds light on the issue of whether international outsourcing offers a means to ‘escape’ the power of domestic unions and on the existence of intra-industry wage dispersion. We show that outsourcing typically increases marginal costs even when it lowers union wages. Despite this, more powerful unions increase the incentive to outsource.

Unionized Oligopoly and Outsourcing

The interaction between labor unions and international competition has received a lot of attention. In the first decade of the 21st century, increasing number of companies in unionized oligopolistic industries has shifted production abroad. However, the issue of outsourcing in the context of a unionized duopoly has received little attention. In this paper, I model the option to outsource in the context of unionized labor markets in exporting industries. I show that if the inverse demand function is convex, then an increase in the foreign wage increases the utility of a wage neutral union. I find that if the domestic firm can credibly threaten to shift production abroad, then an increase in the outsourcing country’s wage may increase domestic profits if the union is labor-oriented.

Endogenous Contracts in Unionized Oligopoly

AbstractWe study the endogenous determination of contracts in a unionized oligopoly and the welfare implications thereof. Alternative contracts specify the sequencing in the selection of R&D and wages. They can be classified as ‘fixed’ when the unions set wages before the firms make their R&D decisions or ‘floating’ when the sequencing of these choices is reversed. If the unions are highly employment‐oriented, we find that either all firm–union pairs choose floating‐wage contracts or both contract types may coexist depending on the degree of technological spillovers. However, when the unions have stronger preference over attaining a good wage deal, then it becomes very likely that fixed‐wage contracts will endogenously emerge because they can serve as an insurance device against oppor tunistic wage increases. Our welfare analysis suggests that welfare‐improving contracts may nevertheless not always arise in equilibrium.

Firm Heterogeneity and Wages under Different Bargaining Regimes: Does a Centralised Union Care for Low-Productivity Firms?

Summary This paper studies the relationship between wages and the degree of firm heterogeneity in a given industry under different wage setting structures. To derive testable hypotheses, we set up a theoretical model that analyses the sensitivity of wages to the variability in productivity conditions in a unionised oligopoly framework. The model distinguishes centralised and decentralised wage determination. The theoretical results predict wages to be negatively associated with the degree of firm heterogeneity under centralised wage-setting, as unions internalise negative externalities of a wage increase for low-productivity firms.We test this prediction using a linked employer-employee panel data set from the German mining and manufacturing sector. Consistent with our hypotheses, the empirical results suggest that under industry-level bargaining workers in more heterogeneous sectors receive lower wages than workers in more homogeneous sectors. In contrast, the degree of firm heterogeneity is found to have no negative impact on wages in uncovered firms and under firm-level contracts.

RAISING WAGES TO DETER ENTRY INTO UNIONIZED MARKETS

This paper investigates entry under a unionized oligopoly when entry and wage negotiations are sequential. We find the incumbent has incentives to raise the wage, which strengthens the bargaining position of the union relative to the entrant at subsequent negotiations and thus discourages entry. We show that entry is more likely to be deterred (accommodated) if the union is wage (employment) oriented and that raising unemployment compensation during recession not only reduces the burden of the unemployed but also induces new entry, creating more employment opportunities. However, during a business boom, reducing unemployment compensation is a better policy.

Labour Tax Policies and Strategic Offshoring under Unionised Oligopoly

In a model with a unionised immobile labour force we analyse how labour taxes and transfers towards unemployed workers are optimally cho- sen when a welfare maximising government faces oligopolistic and partly mobile firms. We consider two polar types of government: one whose objective consists of maximising the sum of domestic producer's and con- sumers' surplus and one that aims at maximising employed and unem- ployed workers' payoffs. We show that depending on the combination of foreign labour costs, the degree of domestic union bargaining power, and the sunk costs of relocation, the former type of government may choose to set taxes so as to induce an outward relocation of production. (author's abstract)

Strategic Profit Sharing in a Unionized Oligopoly

This paper studies the incentives for firms and unions to establish profit sharing contracts as a strategic instrument in a Cournot product market oligopoly with decentralized and centralized wage bargaining. Therefore, we examine the stability of these institutional arrangements and show that unions and firms collectively prefer classical wage contracts. However, under decentralized wage bargaining individual firms and unions have incentives to replace classical wage contracts by profit sharing agreements. Under a centralized wage bargaining system semi-collusion - where firms collude over the form of the labor contract but set product market quantities in a competitive fashion-is externally and internally stable. It can be shown that firms do not have incentives to deviate to negotiate separate firm-level wages unless profit-sharing is feasible. Hence, the possibility to conclude profit-sharing agreements can destabilize the so-called semi-collusive agreement and lead to more decentralized wage negotiations.

Unionized oligopoly and vertical integration

Labor market structures may have important effects on imperfectly competitive rivalries between firms. This paper examines the consequences of unionization for the rivalry between duopoly firms in two types of contracts: vertical integration and vertical separation. If a franchise fee is used to extract the retailer’s profit, then it is in the individual interest of each manufacturer to choose vertical separation and charge his retailer a wholesale price in excess of the unit production cost, depending on the specific time structures. These arguments could make integration preferable for the manufacturer if the wage bargaining power of the union is relatively powerful.