Pattern Bargaining*

Many unions in the United States have for several years engaged in what is known as pattern bargaining. In this article, we show that pattern bargaining is preferred by a union to both simultaneous industry‐wide negotiations and sequential negotiations without a pattern. Allowing for interfirm productivity differentials within an industry, we show that for small differentials, the union most prefers a pattern in wages, but for a sufficiently wide differential, the union prefers a pattern in labor costs. Finally, we demonstrate that pattern bargaining can be a significant entry deterrent. This provides an explanation for why incumbent firms in an industry may support the use of pattern bargaining in labor negotiations.     

Open‐shop unions and product market competition

Abstract Evidence on the effect of product market competition on unionized wages is mixed. In this paper we show theoretically that the result may reflect genuine heterogeneity in the response of union wages to product market conditions. For low levels of unionization, union bargaining power may actually be enhanced by market competition, as firms have more to lose when there is a strike. Using recent data from the UK, we explore interactions between the level of industry competition and unionization, and find supporting evidence for this hypothesis.     

On-the-job search and strategic bargaining

This paper studies wage bargaining in a simple economy in which both employed and unemployed workers search for better jobs. The axiomatic Nash bargaining solution and standard strategic bargaining solutions are inapplicable because the set of feasible payoffs is nonconvex. I instead develop a strategic model of wage bargaining between a single worker and firm that is applicable to such an environment. I show that if workers and firms are homogeneous, there are market equilibria with a continuous wage distribution in which identical firms bargain to different wages, each of which is a subgame perfect equilibrium of the bargaining game. If firms are heterogeneous, I characterize market equilibria in which more productive firms pay higher wages. I compare the quantitative predictions of this model with Burdett and Mortensen's [1998. Wage differentials, employer size and unemployment. International Economic Review 39, 257-273.] wage posting model and argue that the bargaining model is theoretically more appealing along important dimensions.     

Sick pay reforms and health status in a unionised labour market

We theoretically analyse the effects of sick pay and employees' health on collective bargaining, assuming that individuals determine absence optimally. If sick pay is set by the government and not paid for by firms, it induces the trade union to lower wages. This mitigates the positive impact on absence. Moreover, a union may oppose higher sick pay if it reduces labour supply sufficiently. Better employee health tends to foster wage demands. If the union determines both wages and sick pay, we identify situations in which it will substitute wages for sick pay because adverse absence effects can be mitigated.     

Networks of knowledge among unionized firms

Abstract.  We develop a model of strategic networks in order to analyze how trade unions will affect the stability of R&D networks through which knowledge is transmitted in an oligopolistic industry. Whenever firms settle wages, the partially connected network is likely to emerge in the long run if and only if knowledge spillovers are large enough. However, when unions settle wages, the complete network is the unique stable network. In other words, the stronger the union bargaining power is, the more symmetric stable R&D networks will be. In terms of network efficiency, the partially connected network (when firms settle wages) does not Pareto dominate the complete network (when unions settle wages) and vice versa.     

The labor market effects of trade union heterogeneity

Empirical evidence suggests that the bargaining power of trade unions differs across firms and sectors. Standard models of unionization ignore this pattern by assuming a uniform bargaining strength. In this paper, we incorporate union heterogeneity into a Melitz (2003) type model. Union bargaining power is assumed to be firm-specific and varies with firm productivity. This framework allows us to re-analyze the labor market effects of (i) a symmetric increase in the bargaining power of all unions and (ii) trade liberalization. We show that union heterogeneity unambiguously reduces the negative employment effects of stronger unions. Firm-specific bargaining power creates a link between unionization and the entry and exit of firms, implying a reduction of the unions' expected bargaining power. Moreover, union heterogeneity constitutes an (un)employment effect of trade liberalization. If unions are most powerful in the high-productivity (low-productivity) firms, trade liberalization will increase (decrease) unemployment.     

Corporate merger,organizational form,and control of labor

This paper shows that, when two firms merge, the increase in the bargaining strength of the multiproduct firm arising from the merger when negotiating uniform wages with the workers is one of the reasons that account for corporate mergers. Moreover, there is a strategic variable that can be used to decrease union rents in the case of merging, namely, the organization of production decisions.     

Unionization,international integration,and selection

Abstract We study how unionization affects competitive selection between heterogeneous firms when wage negotiations can occur at the firm or at the profit‐centre level. With productivity specific wages, an increase in union power has: (i) a selection‐softening; (ii) a counter‐competitive; (iii) a wage‐inequality; and (iv) a variety effect. In a two‐country asymmetric setting, stronger unions soften competition for domestic firms and toughen it for exporters. With profit‐centre bargaining, we show how trade liberalization can affect wage inequality among identical workers both across firms (via its effects on competitive selection) and within firms (via wage discrimination across destination markets).     

Wage restraint and monetary union

Existing work on wage bargaining predicts more aggressive wage setting under monetary union. This is exemplified by Cukierman and Lippi (2001) who postulate that wages are set having area-wide prices in mind. The insight of aggressive wage behaviour has not been confirmed by the EMU experience, which has been characterised by wage moderation. The present paper investigates the possibility of wage restraint using a monetary union model which, realistically, assumes that trade unions set wages with national prices in mind. Drawing on plausible ranges for all parameter values (and macroeconomic shocks), our simulations show that a monetary union elicits real wages that are broadly comparable to those obtained under monetary autonomy. The confidence bounds around these results are rather wide, in particular including scenarios of wage restraint.     

Endogenous R&D networks when labour unions have preferences over wages and employment

We develop a model to analyse the pattern of R&D network formation when unions have relative preferences over wages and employment. Within a three-firm industry, we show that when the unions place a low weight on wages and technological spillovers are low, a partial R&D network that includes two firms but excludes the third emerges in equilibrium. In contrast, when the unions care a lot about wages, a complete R&D network that includes all firms emerges. For all other intermediate levels of union preferences over wages, there is no strong stable equilibrium network. Empirical implications emerge from these findings, which are also discussed.     

AN ULTIMATUM WAGE BARGAINING EXPERIMENT ON TRADE UNION EFFICIENCY

We present an ultimatum wage bargaining experiment showing that a trade union facilitating non‐binding communication among workers, raises wages by simultaneously increasing employers’ posted offers and toughening the bargaining position of employees, without reducing overall market efficiency.     

UNION–FIRM BARGAINING AGENDA REVISITED: WHEN UNIONS HAVE DISTINCT PREFERENCES

In this paper we revisit the issue of the scope of bargaining between firms and unions by considering a more general union's utility function with distinct preferences and sequential negotiations. First, we compare exogenously given labour market institutions; i.e., right‐to‐manage (RTM) and sequential efficient bargaining (SEB). We show that the conventional wisdom, which states that firms always prefer RTM, no longer holds. In fact, when unions are adequately wage aggressive and have strong enough bargaining power, firms may prefer SEB negotiations; however, firms switch their preference to RTM when unions are very strong. Moreover, we show that a conflict of interest between the parties may emerge when unions are sufficiently employment oriented as well as sufficiently wage aggressive and not too strong or too weak in bargaining. Second, we analyse the endogenous choice of the bargaining agenda. We show that a rich plethora of equilibria may occur and new situations of conflict/agreement of interests between the bargaining parties arise in particular when unions are sufficiently wage‐aggressive.     

STRATEGIC DELEGATION UNDER UNIONISED DUOPOLY: WHO WILL BARGAIN WITH UNIONS?

This paper investigates the choice of a firm's delegate (either the owner or the manager) bargaining wages and employment with a union under a unionised duopoly. We show that if an owner delegates the task of bargaining to a manager, the owner always compensates the manager for profits by penalising sales, regardless of whether the rival owner delegates or not. Moreover, we show that an owner's decision to delegate the task of bargaining to a manager depends on the incremental benefit of delegating and the cost of hiring a manager. The asymmetric outcome (wherein one owner delegates but the other does not) can occur if there is a sufficiently large disparity of hiring costs between the owners. Finally, we show that the union in an owner‐managed firm always earns more than the union in a managerial firm.     

MNEs and wages: The role of productivity spillovers and imperfect labor markets

Disentangling the labor market implications of increased foreign capital flows remains important. This paper provides a unifying framework allowing to study the wage implications of multinational enterprise (MNE) activities, pointing to the importance of controlling for both labor market imperfections and productivity spillovers from foreign to local firms. Results show that increased MNE activities increase average wages in the local economy while contributing to a larger wage dispersion between the MNE and local firms. While the results pertaining to average wages depends heavily on the frictions in the labor market, how much the wage dispersion alters also depends on the extent of productivity spillovers from the MNEs to the local firms and the complementarity between domestic and foreign capital.     

Nonminimal product differentiation as a bargaining outcome

It is well known that in a duopoly model of product choice with quadratic transportation cost, the firms locate at the extreme endpoints of the market. Jehiel (1992, Int. J. Ind. Organ, 10, 633–641) has examined this model in an infinite horizon setting where in the initial period the firms choose location and in subsequent periods charge the Nash bargaining solution prices. Then, in the unique equilibrium both firms locate at the center of the market. This paper examines the case when the firms instead charge the prices determined by either the egalitarian bargaining solution or the Kalai–Smorodinski bargaining solution. It is shown that central agglomeration is an equilibrium. Furthermore, there is a continuum of symmetric equilibria in addition where the firms locate apart from each other. So the products are not necessarily minimally differentiated. Thus different bargaining solutions provide quite different outcomes.     

Efficient bargaining versus right to manage: A stability analysis in a Cournot duopoly with trade unions

The present study considers a unionised (nonlinear) duopoly with two different labour market institutions, i.e. efficient bargaining (EB) and right to manage (RTM), to analyse product market stability under quantity competition with trade unions. We show that when the preference of unions towards wages is small, (i) the parametric stability region under RTM is higher than under EB, and (ii) a rise in the union power in the Nash bargaining played between firms and unions monotonically increases (resp. reduces) the parametric stability region under RTM (resp. EB). In contrast, when the preference of unions becomes larger, an increase in the union's bargaining power acts: (1) as an economic stabiliser when the union power is small; (2) as an economic de-stabiliser when the union power is high. In addition to established results with regard to equilibrium outcomes, our findings shed some light on the effects of how the labour market regulation affects out-of-equilibrium behaviours in a Cournot duopoly.     

Prices,Productivity and Wage Bargaining in Open Economies*

According to the standard union bargaining model, unemployment benefits should have big effects on wages, but product‐market prices and productivity should play no role in the wage bargain. We formulate an alternative strategic bargaining model, where labour and product‐market conditions together determine wages. A wage equation is derived and estimated on aggregate data for four Nordic countries. Wages are found to depend not only on unemployment and the replacement ratio, but also on productivity, international prices and exchange rates. There is evidence of considerable nominal wage rigidity. Exchange rate changes have large and persistent effects on competitiveness.     

The Level of Wage Bargaining as a Firm–Union Choice

There is a trade-off between central bargaining which allows local externalities to be internalized and local bargaining which gives firms and unions the scope to determine both wages and employment simultaneously and efficiently in the sense of McDonald and Solow (1981). A model of strong unions is presented where workers are also concerned with relative wages. The trade-off is resolved by the individual firm and union on the basis of choice, using the Pareto-criterion. In the presence of a small extra contract cost under local bargaining, the main findings are: (i) central bargaining is Pareto-optimal only for extreme values of the reservation income level—a change in unemployment remuneration may cause centralization to breakdown; and (ii) centralization may also be sustained as a suboptimal Nash-equilibrium through workers' concern with relative wages—the familiar Keynesian coordination failure.     

Micro Foundations for Wage Flexibility: Wage Insurance at the Firm Level*

To what extent do firms insulate their workers' wages from fluctuations in product markets? Which firm and worker attributes are associated with wage flexibility at the micro level? We first rely on Guiso, Pistaferri and Schivardi (2005) to estimate dynamic models of sales and wages, finding that in Portugal, workers' wages respond to permanent shocks on firm performance, as opposed to transitory shocks. We then explore the factors associated with wage flexibility, finding that collective bargaining and minimum wages are associated with higher wage insurance by the firm, while the threat of firm bankruptcy reduces it. Managers receive less protection against permanent shocks than other workers.     

NON‐RIGID WAGES AND MERGER PROFITABILITY REVERSAL UNDER CONVEX COSTS AND CENTRALIZED UNIONIZATION

Can a merger from duopoly to monopoly be detrimental for profits? This paper deals with this issue by focusing on the interaction between decreasing returns to labour (which imply firms’ convex costs) and centralized unionization. First, it is highlighted that a wage ‘non‐rigidity’ result applies: the post‐merger wage is higher than in the pre‐merger equilibrium. Second, it is shown that a ‘reversal result’ in relation to merger profitability actually realizes when the union is sufficiently oriented towards wages. Moreover, the higher the reservation wage, the degree of product differentiation, and the union's relative bargaining power, the higher the probability that a merger reduces profits.