The topics discussed in this chapter are wage and employment determination under collective bargaining. This chapter includes contents: Union behaviour, interaction between firms and unions, inefficient production decisions, inefficient union practices, bargaining power.
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Chapter Fifteen
Wage and Employment Determination Under Collective Bargaining
Created by: Erica Morrill, M.Ed
Fanshawe College
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Chapter Focus
Union behaviour
Interaction between firms and unions
Inefficient production decisions
Inefficient union practices
Bargaining power
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Theory of Union Behaviour
Unions attempt to maximize objectives given economic constraints
Ability to characterize preferences of
unions is difficult
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Union Objectives
Utility is a positive function of wage rate and employment
Indifference curve is downward sloping
higher wage is needed to compensate for lower employment
Curves have a convex shape
diminishing marginal rate of substitution
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Special Cases of Objective
Functions
Maximize the Wage rate
indifference curves are horizontal straight lines
Maximize Employment
indifference curves are vertical straight lines
Maximize the (real) wage bill
curve out from the origin-disregards alternative wage rate
Maximize economic rent
curve out from the intersection of alternative wage
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Additional Considerations
Deriving union objectives is simplest
when:
preferences are homogeneous
leaders are constrained by democratic
decision-making processes
union membership is exogenously
determined
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Union Constraints (Wage Only)
Unions negotiate wages taking into
account the consequences
The firm decides the employment level
maximizing profits according to LD curve
LD curve is analogous to a budget
constraint
Equilibrium is the tangent of the
iso-utility curve and LD curve
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Factor in the Firms Iso-profit
Curves
Combinations of wage and employment
of equal profits
Higher profits on lower curves
Firm cannot pay wages below the
alternative wage
Wage will lie between the alternative
wage rate and the bargaining wage
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Relaxing the Demand Constraint
Unions will attempt to alter the constraint
increasing labour demand
making demand more inelastic
Restricting substitution possibilities
collective bargaining
influencing public policy
Influence product market
supporting quotas, tariffs and restrictions on foreign competition
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Efficient Wage and
union’s indifference curve tangent to the
firms iso-profit curve
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Contract Curve
Locus of the Pareto-efficient
wage-employment outcomes
Union cares about wages and employment
CC must lie to the right of LD curve
Firms and unions are better off negotiating an outcome on the contract curve
Moving up on the CC unions better off
Moving down the firm better off
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Efficient Versus Inefficient
Contracts
Labour demand curve model
firm unilaterally sets employment
Contract curve
negotiate over wage and employment
Monitoring and enforcing efficient
contracts are too high in most settings
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Figure 15.6 Inefficient, Approximately Efficient, and Efficient Contracts
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Theory of Bargaining
Predicting the outcome and explaining depend factors
Common features
Set of possible outcomes
Minimum for each party
Voluntary agreement
Neither will agree to an outcome worse
than minimum
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and Nash Solution
T
d f
0
C U
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Solutions to the Bargaining
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Solutions to the Bargaining
Problem
Rubinstein’s Theory
some concepts of non-cooperative game theory
bargainers take turns making offers
counter offers can be made
utility shrinks in each round
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to the Bargaining Problem
2
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Union Bargaining Power
Two meanings
power is related to elasticity
ability to raise wages
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Union Power and Labour
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End of Chapter Fifteen