Unions Collective Bargaining Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

What are we Talking About? Voluntary membership organisations. First unions in the UK (XVIII Century) as craft organizations providing mutual insurance to their members; later, in the XIXth century, industrial unions representing workers in semiskilled positions; since the beginning of the XXth century national organizations with political role. Involved in collective bargaining with employers. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Outline Measures and cross country comparisons –Union density –Coverage and excess coverage –Co-ordination Theory –Collective bargaining –Endogenous membership –A digression on wage differentials Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Outline (cont.) Empirical Evidence – Effects on wages – Bargaining co-ordination and macro performance Policy issues: –Do Unions increase efficiency? (the good and bad face of unions) –Should Bargaining be Decentralized? Why do Unions Exist? Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Presence and influence Union density (only active members?) Coverage of Collective Bargaining “Excess Coverage” Centralisation of bargaining Co-ordination of unions Wage share Hours of strikes Measures and cross country comparisons Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

The Unions They Are’ A-Changin Decline in membership Per given coverage of collective wage agreements Thus dichotomy between unions’ influence and presence: excess coverage Unions’ activities span much beyond membership Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Measures and cross country comparisons

De-unionisation…. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Measures and cross country comparisons

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Measures and cross country comparisons

Unions are popular also among non-members… Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Measures and cross country comparisons spain france portugal greece germany-east italy germany - west netherlands great-britain ireland austria northern ireland belgium luxemburg finland sweden denmark UE Workers need strong union to protect their interestsI'm a member of a trade union

Exogenous membership Most theories of union behaviour take membership as given and concentrate on collective bargaining. The latter is modelled in three different ways: –monopoly unions, –right-to-manage –efficient bargaining Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Theory

Monopoly union model Union sets wages unilaterally maximising the expected utility of a representative worker (median member) subject to the labour demand of the firm. The firm reads off the employment level corresponding to w. No bargaining takes place. Decision applies to all workers (closed shop). Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Theory

Wages N° of workers w* Labour demand curve IC 2 Union’s indifference curves n* = n(w*) IC 1 Monopoly union outcome Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Theory

Right-to-manage model Union and firms bargain over any surplus. Nash-bargaining: max of product of surplus of workers and firms weighted by respective bargaining strenghts (  and (1-  )). Gains as surplus over fallback option. For the firm, the fallback option is zero. For the union member it is the reservation wage, w r. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Theory

Formally Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Theory The right-to-manage agreement then obtains the wage level that maximizes the Nash product: is the bargaining power of unions. The wage level that solves this problem is implicity given by the first order condition of the Nash product: Where are, respectively, the wage elasticiy of labor demand and the elasticity of profits with respect to wages.

Monopoly union and RTM outcomes Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Theory

Efficient bargaining: over L as well Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Theory L w w* LdLd B wuwu β = 1 β = 0 A Isoprofit Indifference curve of the unions C

Endogenous membership Decision to join a union. It depends on policies of unions. Generally sponsor egalitarian wage policies. More successful in recruiting among medium-skilled workers. Under excess coverage, free-rider problem: why should workers pay union dues of they are covered in any event? Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Theory

The free-rider problem Membership decision: Cost-benefit analysis. I join if costs of membership (fees, time) are smaller than benefits (wages, security). How unions solve their free rider problem. Externalities (e.g.,societal values). Provision of exclusive services to members. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Theory

A Digression: Why wage differentials? Competitive model: compensating wage differentials; differences between workers and jobs. Barriers to entry and monopsony power. Asymmetric information, efficiency wages and statistical discrimination. On-the-job search and wage posting. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Theory

Firm-size / firm-wage effects Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Theory

Union Wage Gaps Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Empirical evidence

Results beta coefficient between 3 and 19% in the UK, 5 to 20% in the US. In countries with excess coverage, it is meaningless. Problems also in countries with no excess coverage: – endogeneity, – measurement error, – spillovers. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Empirical evidence

Spillovers (box 3.4) Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Empirical evidence

Inflation, unemployment and bargaining level Macro empirical literature estimating employment and unemployment equations. The macro performance of an economy with both high bargaining coordination and high unionisation is, ceteris paribus, superior to that of an economy with low coordination and unionisation. Lacking co-ordination, better either centralised or decentralised regimes with intermediate regimes offering the worst performance. Serious measurement and endogeneity problems. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Empirical evidence

Real wage (unemployment) Bargaining Coordination Low Intermediate High III II I Notes: I: The effect of internalisation of negative externalities II: Hump-shaped relationship with small foreign trade III: Hump-shaped relationship with large foreign trade A hump-shaped relationship Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Empirical evidence

Do Unions Increase Efficiency? The good and the bad face of unions. Exit vs. voice. Internalisation of externalities. Freeman and Meadoff (1984). Rent extraction: unions stronger in industries with no product market competition. Policy issues Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Unions and Product Market Competition Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Policy issues

Should bargaining be de-centralized? Trade-off between internalisation of externalities (and bargaining costs) and capacity to adapt to idyosincratic productivity shocks. Also effects on workers incentives, motivations, hence productivity. Problem of frequency of bargaining too: staggered contracts. Can performance-related pay reduce frequency of bargaining? Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Policy issues

Moreover… Should unions be involved in the running of UB systems (Ghent systems) or in the administration of pension funds? Chapter 11: UBs Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Why do Unions Exist Like any voluntary organization, unions exist because they are popular among some socioeconomic group. Employers of skilled workers can also favor an extension of the coverage of union wages beyond the presence of unions at the workplace when the presence of unions reduces negotiation costs. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Why Do Unions Exist (cont.) The fast aging of the median union member in some countries suggests that unions may be caught in a vicious circle of aging membership and reduced attractiveness among the young and active population. New firms start often without unions. The share of retirees among union members is increasing everywhere. This means that unions increasingly favor older people in intergenerational conflicts, for example, in the design of public pensions. Unless unions solve this intergenerational problem, they may be headed for the grave. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Review Questions What are the pros and cons of the various measures of the strength of labor unions provided by the literature? What is the Ghent system? Is there an efficient face of unions? Why are unions stronger in industries where there is less competition in product markets? Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Review Questions (cont.) What happens in a right-to-manage model when the bargaining power of workers increases? Why is a right-to-manage bargaining system inefficient? Why do unions pursue egalitarian wage policies? How does competition affect efficient bargaining? Why, in your view, does excess coverage exist?

Practicing with real data Box 3.4: Labor market institutions and the distribution of wages: a semi-parametric approach (pages 67-69). A Stata data file with the Di Nardo, Fortin and Lemieux (1996) dataset, a do file and a log file are available at the website: Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.