Unions Collective Bargaining Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect...

Unions Collective Bargaining

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

What are we Talking About?What are we Talking About?

• Voluntary membership organisations.

• First unions in the UK (XVIII Century) as craft organizations providing mutual insurance to their members; later, in the XIXth century, industrial unions representing workers in semiskilled positions; since the beginning of the XXth century national organizations with political role.

• Involved in collective bargaining with employers.


OutlineOutline

• Measures and cross country comparisons– Union density– Coverage and excess coverage– Co-ordination

• Theory– Collective bargaining – Endogenous membership– A digression on wage differentials


Outline (cont.)Outline (cont.)

• Empirical Evidence – Effects on wages– Bargaining co-ordination and macro

performance

• Policy issues: – Do Unions increase efficiency? (the good and

bad face of unions)– Should Bargaining be Decentralized?

• Why do Unions Exist?


Presence and influencePresence and influence

• Union density (only active members?)

• Coverage of Collective Bargaining

• “Excess Coverage”

• Centralisation of bargaining

• Co-ordination of unions

• Wage share

• Hours of strikes

Measures and cross country comparisons


The Unions They Are’ The Unions They Are’ A-ChanginA-Changin

• Decline in membership

• Per given coverage of collective wage agreements

• Thus dichotomy between unions’ influence and presence: excess coverage

• Unions’ activities span much beyond membership



De-unionisation….De-unionisation….



Unions are popular also among Unions are popular also among non-members…non-members…



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franc

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gree

ce

germ

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italy

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aust

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north

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UE

Workers need strong union to protect their interests I'm a member of a trade union

Exogenous membershipExogenous membership

• Most theories of union behaviour take membership as given and concentrate on collective bargaining.

• The latter is modelled in three different ways:– monopoly unions, – right-to-manage – efficient bargaining


Theory

Monopoly union modelMonopoly union model

• Union sets wages unilaterally maximising the expected utility of a representative worker (median member) subject to the labour demand of the firm.

• The firm reads off the employment level corresponding to w.

• No bargaining takes place. Decision applies to all workers (closed shop).


Theory

Wages

N° of workers

w*

Labour demand curve

IC2

Union’s indifference curves

n* = n(w*)

IC1

Monopoly union outcomeMonopoly union outcome


Theory

Right-to-manage modelRight-to-manage model

• Union and firms bargain over any surplus.

• Nash-bargaining: max of product of surplus of workers and firms weighted by respective bargaining strenghts ( and (1- )). Gains as surplus over fallback option.

• For the firm, the fallback option is zero.

• For the union member it is the reservation wage, wr.


Theory

)1()()())((

wwLwRwwwL drd

FormallyFormally


Theory

The right-to-manage agreement then obtains the wage level that maximizes the Nash product:

wdw

r

w

ww

)1(

L

w

w

Ldw

w

ww

is the bargaining power of unions. The wage level that solves this problem is implicity given by the first order condition of the Nash product:

Where are, respectively, the wage elasticiy of labor demand and the elasticity of profits with respect to wages.

Monopoly union and RTM Monopoly union and RTM outcomesoutcomes


Theory

Efficient bargaining: over L as wellEfficient bargaining: over L as well


Theory

L

w

w*

Ld

B

wu β = 1

β = 0

A

Isoprofit

Indifference curve of the unions

C

Endogenous membershipEndogenous membership

• Decision to join a union. It depends on policies of unions.

• Generally sponsor egalitarian wage policies.• More successful in recruiting among

medium-skilled workers.• Under excess coverage, free-rider problem:

why should workers pay union dues of they are covered in any event?


Theory

The free-rider problemThe free-rider problem

• Membership decision: Cost-benefit analysis.

• I join if costs of membership (fees, time) are smaller than benefits (wages, security).

• How unions solve their free rider problem.

• Externalities (e.g.,societal values).

• Provision of exclusive services to members.


Theory

A Digression:A Digression:Why wage differentials?Why wage differentials?

• Competitive model: compensating wage differentials; differences between workers and jobs.

• Barriers to entry and monopsony power.

• Asymmetric information, efficiency wages and statistical discrimination.

• On-the-job search and wage posting.


Theory

Firm-size / firm-wage effectsFirm-size / firm-wage effects


Theory

Union Wage GapsUnion Wage Gaps


Empirical evidence

ResultsResults

• beta coefficient between 3 and 19% in the UK, 5 to 20% in the US.

• In countries with excess coverage, it is meaningless.

• Problems also in countries with no excess coverage:– endogeneity, – measurement error,– spillovers.


Empirical evidence

Spillovers (box 3.4)Spillovers (box 3.4)


Empirical evidence

Inflation, unemployment and Inflation, unemployment and bargaining levelbargaining level

• Macro empirical literature estimating employment and unemployment equations.

• The macro performance of an economy with both high bargaining coordination and high unionisation is, ceteris paribus, superior to that of an economy with low coordination and unionisation.

• Lacking co-ordination, better either centralised or decentralised regimes with intermediate regimes offering the worst performance.

• Serious measurement and endogeneity problems.


Empirical evidence

Rea

l wag

e (u

nem

ploy

men

t)

Bargaining

Coordination

Low Intermediate High

III

II

I

Notes:

I: The effect of internalisation of negative externalities

II: Hump -shaped relationship with small foreign trade III: Hump -shaped relationship with large foreign trade

A hump-shaped relationshipA hump-shaped relationship


Empirical evidence

Do Unions Increase Do Unions Increase Efficiency?Efficiency?

• The good and the bad face of unions.

• Exit vs. voice.

• Internalisation of externalities. Freeman and Meadoff (1984).

• Rent extraction: unions stronger in industries with no product market competition.

Policy issues


Unions and Product Market Unions and Product Market Competition Competition

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FRANCE GERMANY ITALY SPAIN

mem

bers

as

% o

f em

ploy

ees

Public Utilities Public Administration Manufacturing

0

10

20

30

40

50

60

70

FRANCE GERMANY ITALY SPAIN

mem

bers

as

% o

f em

ploy

ees

Public Utilities Public Administration ManufacturingSource: fRDB survey


Policy issues

Should bargaining be Should bargaining be de-centralized?de-centralized?

• Trade-off between internalisation of externalities (and bargaining costs) and capacity to adapt to idyosincratic productivity shocks.

• Also effects on workers incentives, motivations, hence productivity.

• Problem of frequency of bargaining too: staggered contracts. Can performance-related pay reduce frequency of bargaining?


Policy issues

Moreover…Moreover…

• Should unions be involved in the running of UB systems (Ghent systems) or in the administration of pension funds?

• Chapter 11: UBs


Why do Unions ExistWhy do Unions Exist

• Like any voluntary organization, unions exist because they are popular among some socioeconomic group.

• Employers of skilled workers can also favor an extension of the coverage of union wages beyond the presence of unions at the workplace when the presence of unions reduces negotiation costs.


Why Do Unions Exist (cont.)Why Do Unions Exist (cont.)

• The fast aging of the median union member in some countries suggests that unions may be caught in a vicious circle of aging membership and reduced attractiveness among the young and active population. New firms start often without unions.

• The share of retirees among union members is increasing everywhere. This means that unions increasingly favor older people in intergenerational conflicts, for example, in the design of public pensions.

• Unless unions solve this intergenerational problem, they may be headed for the grave.


Review QuestionsReview Questions

• What are the pros and cons of the various measures of the strength of labor unions provided by the literature?

• What is the Ghent system?• Is there an efficient face of unions?• Why are unions stronger in industries where

there is less competition in product markets?


Review Questions (cont.)Review Questions (cont.)

• What happens in a right-to-manage model when the bargaining power of workers increases?

• Why is a right-to-manage bargaining system inefficient?

• Why do unions pursue egalitarian wage policies?• How does competition affect efficient bargaining?• Why, in your view, does excess coverage exist?

Practicing with real dataPracticing with real data

• Box 3.4: Labor market institutions and the

distribution of wages: a semi-parametric

approach (pages 67-69).• A Stata data file with the Di Nardo, Fortin and

Lemieux (1996) dataset, a do file and a log file are available at the website:

http://www.frdb.org/images/customer/dfl.zip


http://www.frdb.org/images/customer/dfl.zip

Unions Collective Bargaining Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect...

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