Cyclicality of wages and union power

Abstract

This paper examines how trade unions shape the volatility of wages over the business cycle. I present a dynamic stochastic model of the labor market that integrates two main features: search frictions and trade unions. Because of search frictions, each job match yields an economic surplus that is shared by the bargained wage. Therefore, I can decompose the volatility of wages into two components: the volatility of the match surplus and the volatility of the worker share of the surplus. Starting from the unions' objective function, I demonstrate that, under collective wage bargaining, the worker share is endogenous and countercyclical. Consequently, when the economy is hit by a shock, the dynamics of the worker share partially counteract the dynamics of the match surplus and this mechanism delivers endogenous wage rigidity. The model thus sheds new insights into two business cycle features: the union wage premium uctuates countercyclically, and employment is more cyclically sensitive but less persistent when wages are collectively bargained.

Evolution of Union Wages and Determinants

“…They may also influence productivity (Fang et al 2018) and increase unemployment for nonmembers (Morin 2017;Rios-Avila and Hirsch 2014) by restricting the supply of labor (Blanchflower and Bryson 2010) to enhance the wages of their members. This is just a brief review of the additional effects of unions.…”

“…They characterize unions as "the principal institution of workers in modern capitalistic societies" (1984, p. 3). Thus, the main task of unions is generally considered to be the improvement of wages and working conditions for their membership (Morin 2017;Rios-Avila and Hirsch 2014). Depending on the context in which they operate, unions around the globe place varying degrees of emphasis on improving their members' labor market outcomes.…”

Reforms of collective bargaining institutions in European Union countries: Bad timing, bad outcomes?

“…Unions are more aggressive during recessions, which explains why wage premiums are countercyclical (Freeman and Medo, 1984;Bratsberg and Ragan Jr, 2002;Blanchower et al, 2004). As outlined theoretically by Morin (2017), the cyclicality of trade unions' objectives is also driven by the trade-o they face between employment and wages. The trade unions' marginal rate of substitution uctuates endogenously.…”

When is there more employment, with individual or collective wage bargaining?

“…they open up vacant jobs. More recently, Krusell and Rudanko (2016) and Morin (2017) develop dynamic search and matching models of the labour market that introduce trade unions into the Mortensen and Pissarides framework. Krusell and Rudanko (2016) focus on the welfare effect of a monopoly union, while Morin (2017) studies how trade unions affect the cyclical properties of wages, labour market tightness and employment.…”

“…More recently, Krusell and Rudanko (2016) and Morin (2017) develop dynamic search and matching models of the labour market that introduce trade unions into the Mortensen and Pissarides framework. Krusell and Rudanko (2016) focus on the welfare effect of a monopoly union, while Morin (2017) studies how trade unions affect the cyclical properties of wages, labour market tightness and employment. Most of the papers afore mentioned assume a linear production function AL and none of them, however, compares the same wage-setting structure for the two wage-bargaining systems, whereas Jimeno and Thomas (2013) or Cai et al (2014) do so with a single worker (constant marginal product) and heterogeneous firms, comparing individual/firm-level wage setting and sector/collective wage setting, where the same wage is set for all firms.…”