Week9 - Unions

• what do unions attempt to maximise

  the well-being of their members
• when can unions flourish


  only when firms earn above-normal profits
• what aspects of the employment contract do unions influence

  practically all of them
• what is the implication of unions in perfectly competitive markets

  there's no room for unions in perfectly competitive markets as profits are zero - unless all firms unionise
• what is the implication of unions regarded wages and prices

  there are higher wages but also higher prices
• why has union membership declined

  i. the structure of the labour market has changed significantly since 1960's - more service jobs and fewer manufacturing jobs

  
  

  ii. globalisation is bad for unions

  
  

  iii. blue collar workers are less prevalent

  
  

  iv. marked increase in labour force participation rates in women

  
  

  v. workers demand for union jobs has declined

  
  

  vi. firms have become more resistant to unions
• what are the determinants of joining a union


  i. if the union offers agent a wage-employment package that provides more utility than the wage-employment package offered by the nonunion employer

  
  

  ii. wage hikes increase firm costs so there could be employment cutbacks

  
  

  iii. if firms labour demand curve is inelastic the employment reduction is small and vice versa
• explain diagrammatically the decision to join a union


  leisure-dollars graph showing indifference curves and budget constraint

  
  

  increased wages from unions rotate the budget constraint upwards

  
  

  if the principal cuts back hours of work too much then the agent is worse off - hours can only be cut back so the wage remains unchanged
• what is the coverage of union membership like


  in many countries contracts extend to non-union members - high coverage

  
  

  incentive to join unions is diluted
• what is the baseline model for monopoly unions


  a union that is a sole seller of labour

  
  

  wages, W, and employment, N

  
  

  monopoly on supply implies that the union sets the wage

  
  

  employment is set by the firm

  
  

  sequential game : union sets W knowing that firm sets N

  
  

  firm sets N to maximise profits

  
  

  backward induction is used to solve
• what is the unions utility function and what does it imply

  unions are complex but can be said that they prefer higher wages and employment:

  
  

  U(W,N)
• diagrammatically, what is the behaviour of monopoly unions


  a monopoly union maximises utility by choosing the point on the demand curve that is tangent to the unions indifference curve

  
  

  the union chooses a wage and the firm cuts back hours accordingly

  
  

  if the demand curve were inelastic the union could demand a higher wage to get more utility
• how does availability of substitute products affect unions


  unions would attempt to reduce the availability of substitutes for the products they produce, through means such as import restrictions
• how does availability of substitute factors affect unions


  two general substitutes for union labour:

  
  

  i. nonunion labour

  ii. certain types of machines

  
  

  unions attempt to reduce the amount of nonunion labour and nonhuman workers by opposing relation of immigration laws, supporting a high minimum wage and opposing automation as substitute for labour
• what effect does the elasticity of demand have on labour unions

  the more inelastic the demand curve the smaller the cutback in hours worked for a given increase in wages
• what is the model behind unions and market efficiency

  as wages increase in sector 1, displaced workers move to sector 2, lowering the nonunion wage

  
  

  national income falls due to the misallocation of labour
• what is the process of unions delivering wages


  unions bargain with firms over wages - sequential game

  
  

  the game would last forever, but production losses during negotiations as well as impatience leads to an agreement

  
  

  strikes may occur during bargaining
• relatively, how high are the wages bargained when: monopoly unions, Nash bargaining and perfect competition


  monopoly - highest

  Nash bargaining - middle

  perfect competition - lowest
• diagrammatically, describe efficient contracts


  the firm and union could make a deal that makes at least one of them better off without making the other worse off

  
  

  the efficient contract curve lies to the right of the labour demand curve

  
  

  refer to powerpoint 9.2 slide 12
• what does efficient allocation mean in a Pareto sense


  the allocation is such that there are nob deviations from the allocation so unions are better off and the firm is not worse off or vice versa
• can unions control employment


  featherbedding - occurs when labour contracts require overstaffing

  
  

  negotiated to 'make work' for extra staff

  
  

  these contracts do not maximise profits - the firm has the incentive to deviate and its difficult to monitor
• when are strongly efficient contract prevalent


  when there is a vertical contract curve - the firm hires the same number of workers that it would have hired in the absence of a union

  
  

  the union and firm are then splitting a fixed-size pie as they move up and down on the contract curve

  
  

  at the lowest point of the curve the firm keeps all rent

  
  

  at the highest point of the curve the union keeps all rent
• what do empirical studies show about efficient contracts


  wage-employment outcomes un unionised firms do not lie on the labour demand curve

  
  

  there is a disagreement over whether the contract curve is vertical
• what are the causes and effects of strikes

  strikes occur when neither party is willing to give in when negotiating

  
  

  strikes are costly so they shrink the amount of rents over which the parties are negotiating

  
  

  when parties have good information about the costs and likely outcome of a strike, then it is irrational to strike
• what is it called when irrational strikes occur

  Hicks paradox
• explain Hicks Paradox


  strikes are not Pareto optimal - post strike settlements after not being able to reach a suitable negotiation lands below the budget constrain between the unions and firms rents
• what can be said about strikes and asymmetric information


  some argue that strikes occur because members are not well informed about the firms financial status

  
  

  since unions experiences losses during a strike, it will reduce its demands

  
  

  a firm knows that unions will moderate its demands over time

  
  

  a firm incurs costs during a strike, so it will choose a strike duration that maximises the present value of profits
• how is the optimal duration of a strike decided


  unions will moderate their wage demands the longer the strike lasts, generating a downward sloping union resistance curve

  
  

  the employer chooses the point on the union resistance curve that puts them on the lowest isoprofit curve and thus maximises profits

  
  

  this occurs when the isoprofit and union resistance curve are tangent - the strike lasts until this time, t, and the post settlement wage is at this point too

  
  

  so equilibrium of strike length is when the union resistance curve and the isoprofit curve are tangential
• what is the correlation between strike length and frequency, and wage demand

  strikes are more likely to occur and last longer the higher the wage demand
• what is the correlation between unemployment and wage demand

  unions tend to not make high wage demand during periods of high unemployment
• what is the correlation between strike frequency, inflation and real wages


  strikes are more frequent when real wages are growing slowly or during inflation
• what is the correlation between strike and stock value

  strikes are more likely to occur when a firm has a more volatile stock value
• does the union wage gap measure the union wage gain


  the union wage gap overestimates the union wage gain - the typical worker in a union job will be more productive than workers in a nonunion job

  
  

  this occurs due to selection - workers are not randomly allocated to union and nonunion jobs

  
  

  firms paying higher wages to unionised workers select more productive individuals
• what is the estimation method used to estimate the effects of unions


  i. use data on workers in union and nonunion plants to estimate a profit model of union participation - use the results to compute the inverse Mills ration

  
  

  ii. plug the inverse Mills ration in each equation and estimate by OLS
• explain the exit-voice hypothesis


  unions give agents an option of voicing problems through a formal grievance procedure instead of exiting the firm

  
  

  this implies that worker turnover should be lower in unionised firms

  
  

  as labour turnover declines, worker productivity increases

  
  

  profits rise, but not enough to cover increased labour costs

  
  

  productivity increases shift the marginal product of labour out in the union sector, partially compensating for the efficiency loss
• what are the issues with assessing the effects of unions on productivity


  worker quality differs

  managerial quality differs

  both are correlated with union status