IMPLICIT CONTRACTS, TRADE UNIONS AND INVOLUNTARY UNEMPLOYMENT

Implicit contract theory is used to predict the nature of optimal wage-employment contracts between a firm and a union with a utilitarian maximand, under an uncertain revenue product of labour. By allowing recruitment of outsiders in good states, and allowing unemployment of union members in bad states, a rich set of possible trajectories in wages and employment is achieved. Monotonicity of employment in prices is preserved, whereas monotonicity of wages is not.