Lecture Labour market economics: Chapter 15 - Dwayne Benjamin, Morley Gunderson, Craig Riddell

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.

Chapter Fifteen Wage and Employment Determination Under Collective Bargaining  Created by: Erica Morrill, M.Ed           Fanshawe College © 2002 McGraw­Hill Ryerson Ltd Chapter 15­1 Chapter Focus  Union behaviour  Interaction between firms and unions  Inefficient production decisions  Inefficient union practices  Bargaining power © 2002 McGraw­Hill Ryerson Ltd Chapter 15­2 Theory of Union Behaviour  Unions attempt to maximize objectives given economic constraints  Ability to characterize preferences of unions is difficult © 2002 McGraw­Hill Ryerson Ltd Chapter 15­3 Union Objectives  Factors influencing preferences  information available  union’s political decision-making process  degree of homogeneity © 2002 McGraw­Hill Ryerson Ltd Chapter 15­4 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 © 2002 McGraw­Hill Ryerson Ltd Chapter 15­5 Union Objectives and Constraints Figure 15.1 Real Wage W Rate P U U0 a1 U a3 a0 a2 Wa P DL Employment E © 2002 McGraw­Hill Ryerson Ltd Chapter 15­6 Special Cases of Objective Functions  Maximize the Wage rate   Maximize Employment   indifference curves are vertical straight lines Maximize the (real) wage bill   indifference curves are horizontal straight lines curve out from the origin-disregards alternative wage rate Maximize economic rent  curve out from the intersection of alternative wage © 2002 McGraw­Hill Ryerson Ltd Chapter 15­7 Additional Considerations  Deriving union objectives is simplest when:  preferences are homogeneous  leaders are constrained by democratic decision-making processes  union membership is exogenously determined © 2002 McGraw­Hill Ryerson Ltd Chapter 15­8 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 isoutility curve and LD curve © 2002 McGraw­Hill Ryerson Ltd Chapter 15­9 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 Chapter 15­ © 2002 McGraw­Hill Ryerson Ltd 10 Relaxing the Demand Constraint  Unions will attempt to alter the constraint    Restricting substitution possibilities    increasing labour demand making demand more inelastic collective bargaining influencing public policy Influence product market  supporting quotas, tariffs and restrictions on foreign competition Chapter 15­ © 2002 McGraw­Hill Ryerson Ltd 12 Efficient Wage and Employment Contracts  Negotiating over wage and employment is mutually advantageous  Pareto-efficient wage-employment outcomes  union’s indifference curve tangent to the firms iso-profit curve Chapter 15­ © 2002 McGraw­Hill Ryerson Ltd 13 Efficient and Inefficient WageEmployment Contracts Figure 15.5 C W A A’ A’’ B U Wa C’ DL E Chapter 15­ © 2002 McGraw­Hill Ryerson Ltd 14 Contract Curve Locus of the Pareto-efficient wageemployment 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  Chapter 15­ © 2002 McGraw­Hill Ryerson Ltd 15 Obstacles to Reaching Efficient Contacts  Information needed may not be available  An agreement about employment difficult to enforce  Concession bargaining Chapter 15­ © 2002 McGraw­Hill Ryerson Ltd 16 Efficient Versus Inefficient Contracts  Labour  firm demand curve model unilaterally sets employment  Contract curve  negotiate over wage and employment  Monitoring and enforcing efficient contracts are too high in most settings Chapter 15­ © 2002 McGraw­Hill Ryerson Ltd 17 Inefficient, Approximately Efficient, and Efficient Contracts Figure 15.6 C W DLC DL C’ E Chapter 15­ © 2002 McGraw­Hill Ryerson Ltd 18 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 Chapter 15­ © 2002 McGraw­Hill Ryerson Ltd 19 The Bargaining Problem and Nash Solution Figure 15.7 The bargaining problem U U A U1 The Nash solution N UN U U A S C N UN B T d f f1 fN f2 F d fN F Chapter 15­ © 2002 McGraw­Hill Ryerson Ltd 20 Solutions to the Bargaining Problem  Two bargaining theories  process  outcome  Nash’s Theory  Pareto-efficiency  Symmetry  Transformation invariance  Independence of irrelevant alternatives Chapter 15­ © 2002 McGraw­Hill Ryerson Ltd 21 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 Chapter 15­ © 2002 McGraw­Hill Ryerson Ltd 22 The Rubinstein Solution to the Bargaining Problem Figure 15.8 Rubinstein’s Solution U U1 UR U A UA UR U U B U4 Effect of delay Costs B R R d f4 fA f3fB f f2 f1 R F d fR f3 f2 f1 F Chapter 15­ © 2002 McGraw­Hill Ryerson Ltd 23 Union Bargaining Power  Two meanings  power is related to elasticity  ability to raise wages Chapter 15­ © 2002 McGraw­Hill Ryerson Ltd 24 Union Power and Labour Supply  Craft Unions  raise wage by controlling entry through apprenticeship systems  discrimination, nepotism, high dues and closed shop, union shop, agency shop  Professional Associations  occupational licensing and certification Chapter 15­ © 2002 McGraw­Hill Ryerson Ltd 25 End of Chapter Fifteen Chapter 15­ © 2002 McGraw­Hill Ryerson Ltd 26 ... bargaining wage Chapter 15 © 2002 McGraw­Hill Ryerson Ltd 10 Figure 15. 4 The Firm’s and Union’s Preferred Wage-Employment Outcomes W =0 W0 Wu Wf = W a Iu U* If DL * E Chapter 15 © 2002 McGraw­Hill Ryerson Ltd... to the firms iso-profit curve Chapter 15 © 2002 McGraw­Hill Ryerson Ltd 13 Efficient and Inefficient WageEmployment Contracts Figure 15. 5 C W A A’ A’’ B U Wa C’ DL E Chapter 15 © 2002 McGraw­Hill Ryerson Ltd... © 2002 McGraw­Hill Ryerson Ltd Chapter 15 5 Union Objectives and Constraints Figure 15. 1 Real Wage W Rate P U U0 a1 U a3 a0 a2 Wa P DL Employment E © 2002 McGraw­Hill Ryerson Ltd Chapter 15 6 Special Cases