chapter 15-1 chapter fifteen wage and employment determination under collective bargaining modeified...
TRANSCRIPT
Chapter 15-1
Chapter Fifteen
Wage and Employment Determination Under Collective Bargaining
Modeified from slides created by: Erica Morrill
Chapter 15-2
Chapter FocusUnion behaviour Interaction between firms and unions Inefficient production decisions Inefficient union practicesBargaining power
Chapter 15-3
Theory of Union BehaviourUnions attempt to maximize objectives
given economic constraints Ability to characterize preferences of
unions is difficult
Chapter 15-4
Union ObjectivesUtility is a positive function of wage rate
(W) and employment (E): u(W,E) Indifference curve is downward sloping
higher wage is needed to compensate for lower employment
Curves have a convex shape diminishing marginal rate of substitution
Chapter 15-5
DL
Figure 15.1 Union Objectives and Constraints
Real WageRate
WP
Wa
P
Employment E
a2
a1
U0 a3
U2
a0
U1
Chapter 15-6
Special Cases of Objective Functions
Maximize the Wage rate indifference curves are horizontal straight lines
Maximize Employment indifference curves are vertical straight lines
Maximize the (real) wage bill Indifference curve is downward sloping and convex to
the origin (disregards alternative wage rate) Maximize economic rent
curve out from the intersection of alternative wage Maximize total union utility: Lu(w)+(N-L)u(Wa).
Chapter 15-7
Additional ConsiderationsDeriving union objectives is simplest
when: preferences are homogeneous leaders are constrained by democratic
decision-making processes union membership is exogenously
determined
Chapter 15-8
Monopoly Union Model Unions negotiate wages taking into account
the consequences The firm decides the employment level
maximizing profits given W set by the union, which yield the demand for labor function, DL .
DL curve is analogous to a budget constraint
Program: Max u(W,E), subject to DL curve
Equilibrium is the tangent of the iso-utility curve and DL curve
Chapter 15-9
Firms Iso-profit CurvesCombinations of wage and employment
of equal profits, .
Higher profits on lower curvesFirm cannot pay wages below the
alternative wageWage will lie between the alternative
wage rate and the bargaining wage
Chapter 15-10
Figure 15.4 The Firm’s and Union’s Preferred Wage-Employment Outcomes
E
W
DL
U*Iu
0=0W0
Wu
*
IfWf = Wa
Chapter 15-11
Relaxing the Demand Constraint Union’s attempt to alter the constraint in their favor
increasing labour demand (thus increasing E) making demand more inelastic (thus resulting in higher
W and minor job loss) Restricting substitution possibilities
collective bargaining influencing public policy
Influence product market supporting quotas, tariffs and restrictions on foreign
competition
Chapter 15-12
Efficient Wage and Employment ContractsNegotiating over wage and employment
is mutually advantageous Pareto-efficient wage-employment
outcomes union’s indifference curve tangent to the
firms iso-profit curve
Chapter 15-13
Figure 15.5 Efficient and Inefficient Wage-Employment Contracts
DL
A
W
E
B
A’A’’
C
C’Wa
Chapter 15-14
Contract Curve
Locus of the Pareto-efficient wage-employment outcomes
Union cares about wages and employment
CC must lie to the right of DLcurve
Firms and unions are better off negotiating an outcome on the contract curve
Moving up on the CC makes unions better off Moving down makes the firm better off
Chapter 15-15
Efficient Versus Inefficient ContractsMonopoly union model (inefficient)
firm unilaterally sets employmentContract curve (efficient)
negotiate over wage and employment
Chapter 15-16
Figure 15.6 Inefficient and Efficient Contracts
E
W
C’
C
DL
Chapter 15-17
Theory of BargainingPredicting the outcome and explaining
depend factors Common features
Bargaining over a set of possible outcomes Minimum for each party Voluntary agreement Neither will agree to an outcome worse
than minimum
Chapter 15-18
Figure 15.7 The Nash Bargaining Solution
F
U
A
NU0
fNd
T
Max V=(U-U0)*(F-F0) The Nash solution
F0
Chapter 15-19
Solutions to the Sequential Bargaining ProblemRubinstein’s Theory (sequential
bargaining model) some concepts of non-cooperative game
theory bargainers take turns making offers
sequentially counter offers can be made utility shrinks in each round (reflecting
discount factors)
Chapter 15-20
BUB
fB f1f2fR
UR
R
Figure 15.8 The Rubinstein Solution to the Bargaining Problem
F
U
F
RU1
f1d
df4
U0
Rubinstein’s Solution Effect of delay Costs
U4
f3
f2f3fR
UR
U2
Bargaining lasts for 3 rounds: u-f-u3rd round: u offers U0
2nd
round: f offers C; 1st
round: u offers R
C
A
Sequence: f-u-f3rd round: f offers fB
2nd
round: u offers B;
1st
round: f offers A
Chapter 15-21
End of Chapter Fifteen