Union Power as a Reason for Europe Not to Introduce Experience Rating?

Abstract

Theoretical economic literature dealing with the financing of unemployment insurance finds that experience rating helps to solve the externality caused by individually efficient but socially inefficient dismissals and hence reduces unemployment. This is, however, found in models where workers and firms bargain over wages individually. Introducing unionized wage bargaining -which at least in continental Europe is a defining feature of the economy -may reverse the result. This paper provides an example showing that wage setting by a monopoly union can result in an increase in unemployment. (JEL: J 30, J 64, J 65, J 68)

Spillover Effects of Minimum Wages in a Two-Sector Search Model

“…Sinko, 2007), employment protection and/or experience rating (see e.g. Baumann andStähler, 2008, andStähler, 2008). Therefore, the wage setting structure may also play a role whenever we consider a two-sector economy in which competitive wages are set by, for example, unions.…”