Minimum wages and unions
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Minimum Wages and Unions. Outline Minimum wages Unions presence and influence Theories of the effects of unions Monopoly union Right to manage model Models of endogenous union membership. Minimum wages. 5 different types of minimum wages in Europe: Government legislated

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Minimum Wages and Unions

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Minimum wages and unions

Minimum Wages and Unions

Outline

  • Minimum wages

  • Unions presence and influence

  • Theories of the effects of unions

    • Monopoly union

    • Right to manage model

  • Models of endogenous union membership


Minimum wages

Minimum wages

  • 5 different types of minimum wages in Europe:

    • Government legislated

    • Contracted nationally

    • Contracted at the industry-level (and extended erga omnes)

    • Contracted at the industry-level (only for union members)

    • Statutory,but confined to specific industries-jobs


Binding

Binding?

  • Kaitz Index: minimum wage as a proportion of the average wage

  • Dolado et al.: MINWA did not increase significantly throughout Europe in the last 30 years (constant at about 60%)


Problems with the kaitz index

Problems with the Kaitz Index

  • Increase in the minimum wage may increase also the average wage leaving the KI unchanged

  • Concerns the structure of wages rather than dynamicsof real and nominal wages

  • Does not take into account differences in tax rules for high-low wages


Effects of minimum wages

Effects of minimum wages

  • In competitive labour markets as well as under matching frictions and monopoly union, MINWA reduce employment

  • Can increase E only in monopsonistic labour markets (how frequent? when is the employer a “wage-maker”?)

  • Or with efficiency wages (MINWA as a disciplinary device)


Minimum wages and unions

P

ME

Pcp

Minimum wage

AE

Pmon

MV

Qm.w.

Qmon

Qc

Quantity


Empirical evidence

Empirical evidence

  • Different from country to country (see Dolado et al.)

  • Negative effects on employment, notably among youngsters

  • However, less and less young among MINWA recipients and more and more women and temporary workers


Minimum wages and unions

But

  • Card and Krueger (1994) found that MINWA in New Jersey did not reduce E at fast-food restaurants

  • Actually some increase

  • Some of the burden passed to consumers

  • Difficult to reconcile either with competitive and monopsonistic models


Minimum wages and unions

Thus…

  • MINWA essentially as redistributive device

  • Issue of policies reducing low-pay and poverty

  • Then better to index MINWA to prices rather than wages

  • Role of MINWA in decentralising collective agreements?


Unions

Unions

  • Not immanent feature of the European landscape

  • Declining membership

  • Widening cross-country differences in union presence

  • Increasing “excess coverage


De unionisation

De-unionisation….


Unions lost bargaining power

Unions lost bargaining power


Models of unions

Models of unions

  • Unions and management: Government exogenous to the game

  • Objectives of unions: degree of representation of outsiders; internal structure; likelihood of principal-agent problems

  • Objects of bargaining: wages and employment

    U=U(w,e) where e is the employment rate

    in the expected utility version:

    EU= e U(w) + (1-e) U(b)


Unions indifference curves

Wages

IC3

IC2

IC1

Workers, e

Unions indifference curves


Monopoly union model

Monopoly union model

  • Union sets wages unilaterally so that to maximise the expected utility of a representative worker subject to the labour demand of the firm

  • The firm reads off the employment level corresponding to w

  • No bargaining takes place

  • Union as closed shop


Monopoly union outcome

Monopoly union outcome


Equilibrium

Equilibrium

  • First-order condition:

     = w u’(w)/[u(w)-u(b)]

  • that is, elasticity of labour demand, , is equal to % change in utility associated with % change in unions’ wages


Right to manage model

Right-to-manage model

  • Union and firms bargain over any surplus

  • Nash-bargaining: max of product of bargaining surplus of workers and firms weighted by respective bargaining strenghts ( and (1- ))

  • Gains as surplus over fallback option

  • For the firm, the fallback option is zero

  • For the union member is u(b)


Equilibrium1

Equilibrium


Comparing the 2 equilibria

Monopoly union

 = w u’(w)/[u(w)-u(b)]

Right-to-manage

 =  w u’(w)/[u(w)-u(b)]

- (1-) [w e/(p q(e)-we)]

Comparing the 2 equilibria

Note: when =1, RTM=MU, when =O, RTM=competitive


What else do unions do

What else do unions do?

  • Non-wage compensation and working conditions

  • Compression of wage inequalities (rationale: ideology, insurance, savings on negotation costs)

  • Provision of services to their members as a way to solve the free-rider problem

  • Political role


Excess coverage coverage membership

“Excess coverage” (coverage - membership)


Free riding

free-riding ?

Union Membership and Excess Coverage in European Countries

80

y = 1.1916x + 32.824

2

R

= 0.5605

70

FR

SP

60

GER

ITA

50

NET

AUT

Excess Coverage (1980)

40

BEL

30

FIN

Spearman Rho: 0.5579

UK

20

Level of Significance: 10%

10

POR

SW

0

-20

-10

0

10

20

30

40

Decline in union membership (1980-1995)


Levels of bargaining

Levels of bargaining

  • National

  • Industry-level

  • Plant-level

  • Trade-off between internalisation of externalities (and bargaining costs) and capacity to adapt to idyosincratic productivity shocks


Centralisation of bargaining

Centralisation of bargaining


Endogenous membership

Endogenous membership

  • Decision to join a union

  • If costs (membership fees) lower than benefits

  • Given union wage compression, low-skilled types are more likely to join a union (also those with more rents to split)

  • Insiders and outsiders


Are unions stronger in sheltered sectors

Are Unions stronger in sheltered sectors?


Union membership by contract type

Union Membership by Contract Type


The decision to join a union

The decision to join a union


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