ec406 unions
TRANSCRIPT
The Theory of Trade Unions: A Brief Introduction
Background
• suppose labour markets are competitive i.e. each employer thinks they can hire as many workers as they want at the going market wage, B
• the wage paid will be equal to B - there is no point in paying a higher wage and a lower wage results in no workers being hired.
• the firm will choose the level of employment to maximize profits which leads to MRPL=B:
'R N B
In a picture…
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Log
Wag
e
0 1 2 3 4log employment
log MRPL log competitive wage
What happens to wages/employment if there is a union?
• need to make some assumptions about:– the preferences of the union– the process of bargaining between employer
and union.
The preferences of unions
• large literature debating what the objective function of a union is likely to be.
• But good reason to think unions like: – higher wages (unions do set out to raise
wages for their members)– higher employment (they normally fight
reductions in employment).
• A simple way of capturing these ideas is to assume that the utility function has the form: U N W B
So indifference curves look like..
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Log
Wag
e
0 1 2 3 4log employment
log MRPL log competitive wageunion indifference curve
The Process of Bargaining
• Two main issues:– the subject of bargaining– whose preferences, employer or union, get most weight in
determining the outcome.
• On the subject of bargaining, there are two main models:• the labour demand curve (or right-to-manage) model
– unions and employer negotiate the wage but employment is determined unilaterally by the employer.
• the efficient bargain model– unions and employer negotiate both the wage and employment.
The Labour Demand Curve Model
• Given wage, employment will be where MRPL=w
• But what will be the wage?
• Consider extreme case where union has all the bargaining power
• Will choose point on labour demand curve that gives highest utility
Graphically…
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Log
Wag
e
0 1 2 3 4log employment
log MRPL log competitive wageunion indifference curve
What determines how high this wage will be?
• One can show that the wage will be lower:– the more sensitive is labour demand to the
wage (the higher the wage elasticity of labour demand) – a high elasticity makes the trade-off between wages and employment less attractive.
– the more the union cares about employment relative to the wage.
Between the extremes..
• What happens if we have some distribution of bargaining power between union and employer between the two extremes we have discussed?
• It should not be hard to see that we will have some outcome on the labour demand curve between the two extremes and that the wage will be lower:– the more bargaining power the employer has
In the labour demand curve model..
• Unions raise wages
• Unions reduce employment
• Unions reduce profits
• In a model with capital they would also reduce investment
• But perhaps this is not the final word
The Efficient Bargain Model
• The labor demand curve model is based on a ‘realistic’ set of assumptions.
• The criticism is that the outcome has unexploited gains from trade.
• To see this consider drawing iso-profit curves on Figures. The have an inverted u-shape and, more importantly, they are horizontal at all points on the labour demand curve.
Implication
• at the monopoly union outcome, the firm iso-profit curves and union indifference curves are not tangential
• both parties could be made better-off by swapping a reduction in the wage for some increase in employment away from the labor demand curve.
• The efficient bargain model makes both wages and employment the subject of bargaining
• leads to an outcome in which all gains from trade are exploited and union indifference curves and firm iso-profit curves are tangential.
• there are many such points differing in the distribution of surplus between employer and union – the set of these points is called the contract curve.
The Contract Curve
• Can show that contract curve has the form
• If γ=0 then same as labour demand curve• If 1>γ>0 then downward-sloping• If γ=1, then vertical• If γ>1, upward-sloping• Unions raise wages but may also raise
employment (depending on preferences)
Empirical Evidence: Wages
• very large literature on the effect of unions on wages (the union wage mark-up).
• Typically this includes union status in an earnings function together with other factors and interprets the coefficient on the union variable as the causal effect of union status on wages.
• Little experimental or quasi-experimental evidence but people accept this literature as it gives ‘sensible’ answers – a mark-up of 15+% in the US, 10% in the UK (though zero in recent years).
Empirical Evidence: Employment
• The literature on the impact of unions on employment is tiny.
• In part this is because the equivalent of the above wage regression – regress employment on union status leads to a strong positive effect, something people have been very reluctant to believe.
• Perhaps for good reason, as unions may be more likely to succeed in organizing workers in large firms.
diNardo-Lee
• Contribution needs to be set against weaknesses of other literature
• They exploit the fact that unions in the US have to win a representation election to be allowed to negotiate.
• This leads to a RDD design in which one can compare subsequent outcomes in firms where the union just won with the outcome in firms where the union just lost.
• There is a good discussion in the paper of what one can hope to estimate using this – the ‘impact of unionization’ is too simple. They summarize what one might expect in:
Conclusion
• union impact on the ‘bottom line’ is very small on:– business survival– Employment– Output– Productivity– wages
• i.e. unions seem to do very little. A representative type of empirical finding is:
The Effect on Employment
A puzzle
• Even the effect on wages is very small compared to previous estimates.
• How can we interpret these results and reconcile them with other findings:– studies ‘young’ unions who have less impact – but wage effect
on cross-section is similar to other studies.– can only identify effect at margin but not much evidence of other
effects.
• Its all a bit troubling – this study has the best quality data but conclusions that are at odds with – what many people think– the fact that employers spend large sums of money trying to
avoid unions.
Conclusion
• Hard to get good research design to study the effect of unions
• Best study we has fails to find any effects at all
• But reluctant perhaps to believe that
• Research does not always give us clear answers