Unions and Collective Bargaining

1
Unions and Collective Bargaining

• Labour
• Lecture 1
• Dr. Toke S Aidt

2
Practicalities

• Course material on http//www.econ.cam.ac.uk/facul
  ty/aidt/ teaching.htm.
• Office hour Monday 12-13, room 31.
• Supervisions from TF (assignment on web-page).

3
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.
• Prof. Browns lectures will complement this.

4
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.

5
The Orthodox View

• Unions distort the allocation of factors of
  production.
• share supernormal profits with firms.
• monopolise labour supply.
• threat of a strike.
• The monopoly costs of unions
• misallocation of labour
• the hold-up problem.
• and many others

6
Misallocation of labour
WU
WNU
VMPL in union sector
DW cost
Wu
Wc
Wnu
VMPL in nonunion sector
7
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.

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A theory of unions
Objectives
Collective agreement
Conflict
Economics constraints
Strikes lock outs
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What does the union maximize?
Little empirical evidence a standard revealed
preference problem.
w union wage n employment t membership b
outside wage

• Economic welfare of the members
• No principal agent problem

Utilitarian union
Expected utility
The same?
10
Union indifference curves
Trade off between high wages and high employment
of members.
A
B
n
11
Firms
Profit maximization (so, ignore agency problems)
constant elasticity
w
production function
price
n
Labour demand function
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Product market conditions

• 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

Rents available for sharing
13
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

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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.
15
st
w
A
wu
b
n
t
nu
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Union mark-up
Elasticity of labour demand

• The more inelastic the labour demand the higher
• the mark-up.
• No mark-up if demand is perfectly elastic.

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The model in action

• The Business cycle labour demand shifts in and
  out

w
If the elasticity of labour demand is constant,
then the union model predicts a sticky nominal
wage.
normal
wu
n
recession
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2. Outside option
w
low b
Outside option improves and the union wage goes
up.
wu
wu
Outside options bad in recession?
n
high b
3. Membership effects More members have no
impact on the optimal union wage.
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Empirical implications

• b affects wages, but not employment directly.
• Membership (t) has no impact on wages
• wages are sticky.

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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