Unions and Collective Bargaining (PowerPoint)

							Unions and Collective
    Bargaining
        Labour
       Lecture 1
    Dr. Toke S Aidt
            Practicalities
• Course material on
  http://www.econ.cam.ac.uk/faculty/aidt/
  teaching.htm.

• Office hour: Monday 12-13, room 31.

• Supervision assignment on web-page.
         Purpose of course
• Economic approaches to unions and
  collective bargaining versus industrial
  relations approaches.
• Focus on theoretical models and
  econometrical testing rather than
  institutional details.
              Overview
• Lecture 1: The orthodox view and the
  monopoly union
• Lecture 2: Bargaining models of unions
  and and the Hicks Paradox.
• Lecture 3: Collective response and
  hybrid models of unions.
• Lecture 4: Empirical evidence on union
  mark-ups.
          The Orthodox View
• Unions monopolise labour supply and use
  threat of a strike to share supernormal profits
  with firms.
• This distorts the allocation of factors of
  production.
• This leads to the monopoly costs of unions:
   – misallocation of labour
   – the hold-up problem.
   – and many others
     Misallocation of labour
WU   VMPL in union sector                         WNU

                      DW cost
Wu

                                                  Wc

                                                  Wnu



                        VMPL in nonunion sector
          Hold-up problem
• Union and firm share rents.
• The size of the rent depends on
  investments in capital by firm.
• Firm anticipates that it will only get a
  share of the extra rent generated by its
  investment.
• Firm has incentive to under-invest.
• Inefficiently low levels of investments.
        A theory of unions

                         Collective
Objectives
                         agreement
              Conflict
Economics                     Strikes
constraints                  lock outs
            What does the union
               maximize?
  • Economic welfare of the members      w = union wage
                                         n = employment
  • No principal agent problem           t = membership
                                         b = outside wage

    UT  nu ( w)  (t  n)u (b)       Utilitarian union


    EU  n u ( w)  (1  n )u (b)
         t               t
                                      Expected utility

The same?
    Union indifference curves
       EU        u ( w)  (1  n )u (b)        (u ( w)  u (b))  u (b)
w             n
              t                 t
                                             n
                                             t




                           Trade off between high wages
        A                  and high employment of members
                           along indifference curve

                           High wage and high employment
                           increase union welfare

                                  B


                                                                n
                       Firms
Profit maximization:
                                    w         constant
              production function

   pq(n)  wn
                                              elasticity


     price
                                                     n

w  pq' (n)  n  n( w / p)
                          Labour demand function
    Product market conditions
            (the economic environment)
              Rents available for sharing…

• Perfect competition (takes p as given)

       • restrictions on entry
       • no non-union foreign competitors
       • fixed capital

• Imperfect competition (face product market demand)
    • High correlation between imperfections
    • Product differentiation
          Conflict resolution
Union wants high wages and employment, but
firms are only willing to employ many at low wages.

•   Monopoly union model
•   Right to manage model
•   Efficient bargaining model
•   Strike models
    The monopoly union model
•   All workers in a sector are unionised.
•   Decentralized bargaining.
•   Union sets the wage, w
•   The firm sets employment given the wage
    (the right to manage).

Note: No explicit bargaining takes place.
max w EU  n w  (1  n )b
           t          t
                             st   n  n( w / p )
  w

                             wu  b 1
                                   
                              w u
                                     

                 A
  wu

   b


                                              n
                nu   t
       Union mark-up

         w b 1
           u                 Elasticity of labour
                            demand
          wu
               
• The more inelastic the labour demand the higher
  the mark-up.
• No mark-up if demand is perfectly elastic.
            The model in action
1. The Business cycle: labour demand shifts in and out
w
                                If the elasticity of
                   normal       labour demand is
                                constant, then
wu                              the union model
                                predicts a sticky
                                nominal wage.
                            n
recession
                       wu         n u
 2. Outside option:        0           0
                        b         b
w
                      low b     Outside option improves
                                and the union wage goes up
wu
wu                              with indirect effect on
                                employment.
                                       Outside options bad
                                 n
                                       in recession?
high b                                  counter-cyclical
                                          reaction of union
 3. Membership effects: More members have no impact
 on the optimal union wage.
      Empirical implications
• b affects wages, but not employment
  directly.

• Membership (t) has no impact on wages

• wages are sticky.
             What is next?
• Bargaining and agreement (Nash
  bargaining)
• Models of unions based on bargaining:
  – right to manage model
  – the efficient bargaining model
• Empirical evidence on these models