Trade unions Borjas ch. 10 (not 10.1, 10.2, 10.4, 10.6, 10.9) Wages and work conditions are often agreed collectively rather than individually. First labour unions in Britain in the 18th century. ”Combination acts” (Anti-union laws): There should be perfect competition in the labour market. Adam Smith: Workers need to organise formally to have the same coordination that employers can acheive over a dinner. There is no ”perfect competition in the labour market” so worker unions redress the balance. Today: The right of workers to organise is guaranteed in an ILO convention which most countries have signed. Still, every month trade-unionists around the world are fired, jailed or even murdered.

Both workers’ and employers’ organisation are important in the labour market. But economic theory and research have focussed on labour unions. Unions have very different strength in different countries, including OECD- countries. There are different degrees of unionisation (share of the work force organised) The coverage of collective agreements with unions can be broader than only union members (for ex. France). The legal rights and status of unions differs between countries,

Two types of unions: Craft unions (Example: Britain) Industrial unions (Example: Scandinavia)

Unionisation rates 1970-2000, selected OECD countries Source: OECD, cited in Björklund et al Arbetsmarknaden

Source OECD StatExtracts http://stats.oecd.org/Index.aspx?DataSetCode=UN_DEN

Average over OECD countries (%) 1970 1980 1990 2000 42 47 42 35 1970 1980 1990 2000 42 47 42 35 Country comparison: The Scandinavian countries have high rates (less in Norway). US and France have very low rates. UK has relatively high but much less than before 1979.

Over time In the Scandinavian countries, unionisation increased in the 1970s Increased unionisation of white-collar workers Growth of the public sector with high level of unionisation. In most countries unionisation decreased in the 1980s, particularly in UK and US. (Finland and Spain are exceptions in the diagram.)

Unions in Sweden Unions in Sweden are organised in 3 national confederations which include both public and private sector workers The Swedish Trade Union Confederation (Landsorganisationen i Sverige, LO) for blue-collar workers The Swedish Confederation for Professional Employees (Tjänstemännens Centralorganisation, TCO) for lower-middle level white-collar workers The Swedish Confederation of Professional Associations (Sveriges Akademikers Centralorganisation, SACO) for workers with academic education Two small unions, SAC (syndicalists) and the Swedish Dockworkers’ union are independent.

Union membership 2006 LO: 1.8 million (47 % women). Largest member federation: Municipal workers (Kommunalarbetarförbundet). (Earlier engineering workers, Metallarbetarförbundet) TCO: 1.3 million, (60+ % women) SACO 586 000 members (51% women). Rate of unionisation: 77 % According to LFS: Men: 72%, Women: 78%. In permanent employment: 79%

Union membership 2010 LO: 1.6 million (46 % women in 2008). Big drop in membership from 2006. TCO: 1.2 million, (60+ % women) SACO 605 000 members (52% women). Rate of unionisation: 71 % (2008) In private sector: 65 % Men: 68% Women: 74 % Source: Studies in Social Policy, Industrial Relations, Working Life and Mobility. Research Reports 2010:1

Percent organised 1987-2003 Private sector Public sector Age 16-29 30-44 45-64 16-29 30-44 45-64 1987 66 80 83 81 94 94 2003 55 75 82 65 90 94 The drop 2006-2009 was about twice as large for younger (16-29) as for older workers.

Coverage by collective agreements 3.5 million Swedish employees are covered by some collective agreement. 3.7 million if those covered by ”hängavtal” are included. (Agreement between union and an employer who isn’t organised.)

Since 1983 negotiations have become more decentralised From confederations to industrial federations (förbund). From national to local level To individual wage negotiations for employees.

Traditionally Men were more often organised than women (not true any more). Blue-collar workers more often than white-collar Manufacturing workers more than service workers Temporary workers less than permanent

Incentives to join a union depends on whether The wage elasticity of employment is low (see ch. 3). They offer insurance (or top up social insurance) and other benefits to members (including assistance in negotiations or conflicts with the employer) . The size of fees. Unemployment benefits are adminstered by the unions. The employer’s reaction – risk of harassment. Traditions, values and ideology (the free-rider problem)

The free-rider problem If unions ask better conditions only for their members, the employer has incentives to hire non-union labour (or persuade workers to leave the union). If all workers – members or not - are covered by the conditions of the union collective agreement, the provisions are a public good. Workers have incentives not to be fee-paying union members.

Economic theory of unions Economic research on unions, but little so far on employers’ organisations. Starting model: ”MONOPOLY UNIONS” Unions are assumed to maximise utility as a function of wage rates and employment. The utility function is assumed to have the usual properties of positive and decreasing marginal utilities. The union is assumed to set the wage and the firm to react by choosing the corresponding point on its labour demand curve. In this model unions take employment into account but bargain only over the wage.

Typical example of model of union behaviour: E = employed members, N=total no members, w=wage rate, U0=utility when unemployed. If U(w)>U0 it follows that The more a wage rise reduces employment, the less the union will push for it The level of unemployment benefits and the attitudes towards being unemployed also influence union behaviour.

Monopoly Union If the union has monopoly control over labour supply it will choose a point on the firms labour demand curve where D is tangent to a Union indifference curve. Without a union the firm chooses the profit maximising w* and E*. w D wU Lower wage elasticity of demand  a steeper D  an increase in wu will reduce employment less. W* EU E* E

Modification: Negotiations w Assume instead that the union’s preferred choice is wU and wR is the worker reservation below which the firm cannot hire any workers. The negotiated wage will be between those two, where depends on bargaining power. D wU WR EU ER E

Efficient bargaining These two models assumed that the outcome is always a point on the firm’s labour demand curve - a point where VMP=w. The efficient bargaining model shows that there may be outcomes not on the labour demand curve that both parties prefer. In this model unions bargain over both employment and wages.

Isoprofit curves: In chapter 4 we saw isoprofit curves as the combinations of E and K that give the firm the same profit. Now we will use isoprofit curves that are made up by the combinations of w and E that give the firm the same profit.

Isoprofit curves The isoprofit curves are concave towards the E-axis and attain their maximum point on D. At that point the slope is zero because when w=VMP a marginal change in employment doesn’t change profits w D The lower the curve, the higher the profit. W A point off D cannot be optimal for the firm – at wage w a lower isoprofit curve (higher profit) is attainable than at (E1, w) A E E1 E2

Combining the iso-profit curves and the union indifference curves: R is as good as M for the firm – points from Q to R are better Q is as good as M for the union – points from Q to R are better U* UM UR UZ w* E* wZ EZ wM P Q R Z Employment Dollars M p* pM pZ Zero profits Reservation wage

All points where a union indifference curve is tangent to an isoprofit curve are Pareto optimal. They won’t choose a point above the zero-profit curve πz (the firm would go out of business). They won’t choose a wage below the reservation wage (the firm must be able to hire workers). BUT ANY TANGENCY POINT BETWEEN P AND Z IS A POSSIBLE OUTCOME: WHICH IT WILL BE DEPENDS ON BARGAINING POWER. The line from P to Z, through the tangency points is the CONTRACT CURVE and any point on it is called an EFFICIENT CONTRACT. Efficient contracts are to the right of D – E is larger than with a monopoly union.

A special case: The strongly efficient contract Assume that the shape of the union indifference curves are such that the contract curve is vertical. There will still be bargaining over wages. But irrespective of the wage, employment will be the same. If employment is the same, production is the same as with a non-union wage. With a strongly efficient contract (but not otherwise) there will be allocative efficiency.

Strongly efficient contract If the contract curve PZ is vertical, 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 the contract curve. At point P, the employer keeps all the rents; at point Z, the union gets all the rents. A contract on a vertical contract curve is called a strongly efficient contract. U* UM UR UZ w* E* wZ EZ wM P Q R Z Employment Dollars M p* pM pZ

Empirical studies have found that wage- employment outcomes in unionized firms do NOT lie on the labor demand curve There is disagreement over whether the contract curve is vertical

The Union Wage Gap Empirically, most studies find that organised workers have higher wages. But is this wage differential a measure of the impact of being organised? It is not equal to what the same worker would loose/gain by leaving/joining a union. Unions tend to be stronger in firms and industries with higher profits (often large firms). Unions can have ”spillover effects” on unorganised workers’ wages. Unions can have ”threat effects” on unorganised workers’ wages. Wage dispersion tends to be smaller where unions are stronger, at firm and country level. (Compare the ”solidaristic wage policy” of the 60s and 70s). The more centralised bargaining the smaller the gender gap. (Cross country-comparison by Blau and Kahn).

Unions and productivity – exit/voice hypothesis According to sociological theory, organisations can give discontent two different kinds of outlets People can exit – ”vote with their feet” They can have ”voice” – channels of influence in the organisation According to the exit/voice hypothesis unions give workers ”voice” so that the firm can handle discontent and complaints without loosing workers with firm-specific human capital. Lower turnover and less marks of discontent (work-to-rules, go-slows, ”wildcat strikes”) saves money for the firm.

In the 1920s and 1930s Sweden had more strikes than most other European countries. The agreement between the national employers’ organisation and LO in 1938 (Saltsjöbadsavtalet): Employers granted unions the right to organisation, recognition and collective agreements. Unions granted the employers the right ”to lead and allocate work” (”leda och fördela arbetet”, ”right to manage”). Saltsjöbadsavtalet: Reduced the incidence of strikes to one of the lowest in Europe. Gave union preferences some impact on the wage structure. (A less dispersed wage distribution.)

Labour legislation in the 1970s gave the unions more influence on lay-offs (LAS) and the right to negotiate over a wider range of issues (Medbestämmandelagen). The employers’ organisation no longer wanted the centralised agreements and pressed for more wage dispersion.