© 2002 McGraw-Hill Ryerson Ltd.Chapter 15-1 Chapter Fifteen Wage and Employment Determination Under Collective Bargaining Created by: Erica Morrill, M.Ed Fanshawe College

© 2002 McGraw-Hill Ryerson Ltd.Chapter 15-2 Chapter Focus Union behaviour Interaction between firms and unions Inefficient production decisions Inefficient union practices Bargaining power

© 2002 McGraw-Hill Ryerson Ltd.Chapter 15-3 Theory of Union Behaviour Unions attempt to maximize objectives given economic constraints Ability to characterize preferences of unions is difficult

© 2002 McGraw-Hill Ryerson Ltd.Chapter 15-4 Union Objectives Factors influencing preferences information available unions political decision-making process degree of homogeneity

© 2002 McGraw-Hill Ryerson Ltd.Chapter 15-5 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 McGraw-Hill Ryerson Ltd.Chapter 15-6 DLDL Figure 15.1 Union Objectives and Constraints Real Wage Rate WPWP WaPWaP Employment E a2a2 a1a1 U0U0 a3a3 U2U2 a0a0 U1U1

© 2002 McGraw-Hill Ryerson Ltd.Chapter 15-7 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

© 2002 McGraw-Hill Ryerson Ltd.Chapter 15-8 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 McGraw-Hill Ryerson Ltd.Chapter 15-9 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

© 2002 McGraw-Hill Ryerson Ltd.Chapter 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

© 2002 McGraw-Hill Ryerson Ltd.Chapter Figure 15.4 The Firms and Unions Preferred Wage-Employment Outcomes E W DLDL U* IuIu 0 =0 W0W0 WuWu * IfIf W f = W a

© 2002 McGraw-Hill Ryerson Ltd.Chapter 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

© 2002 McGraw-Hill Ryerson Ltd.Chapter Efficient Wage and Employment Contracts Negotiating over wage and employment is mutually advantageous Pareto-efficient wage-employment outcomes unions indifference curve tangent to the firms iso-profit curve

© 2002 McGraw-Hill Ryerson Ltd.Chapter U Figure 15.5 Efficient and Inefficient Wage- Employment Contracts DLDL A W E B A A C C Wa

© 2002 McGraw-Hill Ryerson Ltd.Chapter 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

© 2002 McGraw-Hill Ryerson Ltd.Chapter Obstacles to Reaching Efficient Contacts Information needed may not be available An agreement about employment difficult to enforce Concession bargaining

© 2002 McGraw-Hill Ryerson Ltd.Chapter 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

© 2002 McGraw-Hill Ryerson Ltd.Chapter Figure 15.6 Inefficient, Approximately Efficient, and Efficient Contracts E W C C DLCDLC DLDL

© 2002 McGraw-Hill Ryerson Ltd.Chapter 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

© 2002 McGraw-Hill Ryerson Ltd.Chapter Figure 15.7 The Bargaining Problem and Nash Solution F U F U S A N UNUN fNfN d T d f0f0 C U0U0 f1f1 U1U1 A fNfN UNUN N f2f2 U2U2 B The bargaining problem The Nash solution

© 2002 McGraw-Hill Ryerson Ltd.Chapter Solutions to the Bargaining Problem Two bargaining theories process outcome Nashs Theory Pareto-efficiency Symmetry Transformation invariance Independence of irrelevant alternatives

© 2002 McGraw-Hill Ryerson Ltd.Chapter Solutions to the Bargaining Problem Rubinsteins Theory some concepts of non-cooperative game theory bargainers take turns making offers counter offers can be made utility shrinks in each round

© 2002 McGraw-Hill Ryerson Ltd.Chapter fAfA UAUA A B UBUB fBfB f1f1 f2f2 fRfR URUR R Figure 15.8 The Rubinstein Solution to the Bargaining Problem F U F R U1U1 f1f1 d d f4f4 U0U0 Rubinsteins Solution Effect of delay Costs U4U4 f3f3 f2f2 f3f3 fRfR URUR U2U2

© 2002 McGraw-Hill Ryerson Ltd.Chapter Union Bargaining Power Two meanings power is related to elasticity ability to raise wages

© 2002 McGraw-Hill Ryerson Ltd.Chapter 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

© 2002 McGraw-Hill Ryerson Ltd.Chapter End of Chapter Fifteen