© 2002 mcgraw-hill ryerson ltd.chapter 15-1 chapter fifteen wage and employment determination under...
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© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-1
Chapter Fifteen
Wage and Employment Determination Under Collective Bargaining
Created by: Erica Morrill, M.Ed Fanshawe College
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-2
Chapter FocusUnion behaviour Interaction between firms and unions Inefficient production decisions Inefficient union practicesBargaining power
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-3
Theory of Union BehaviourUnions attempt to maximize objectives
given economic constraints Ability to characterize preferences of
unions is difficult
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-4
Union ObjectivesFactors influencing preferences
information available union’s political decision-making process degree of homogeneity
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-5
Union ObjectivesUtility is a positive function of wage rate
and employment Indifference curve is downward sloping
higher wage is needed to compensate for lower employment
Curves have a convex shape diminishing marginal rate of substitution
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-6
DL
Figure 15.1 Union Objectives and Constraints
Real WageRate
WP
Wa
P
Employment E
a2
a1
U0 a3
U2
a0
U1
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-7
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 curve out from the origin-disregards alternative wage
rate Maximize economic rent
curve out from the intersection of alternative wage
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-8
Additional ConsiderationsDeriving union objectives is simplest
when: preferences are homogeneous leaders are constrained by democratic
decision-making processes union membership is exogenously
determined
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-9
Union Constraints (Wage Only)Unions negotiate wages taking into
account the consequencesThe firm decides the employment level
maximizing profits according to LD curveLD curve is analogous to a budget
constraint Equilibrium is the tangent of the iso-
utility curve and LD curve
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-10
Factor in the Firms Iso-profit CurvesCombinations of wage and employment
of equal profitsHigher profits on lower curvesFirm cannot pay wages below the
alternative wageWage will lie between the alternative
wage rate and the bargaining wage
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-11
Figure 15.4 The Firm’s and Union’s Preferred Wage-Employment Outcomes
E
W
DL
U*Iu
0=0W0
Wu
*
IfWf = Wa
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Relaxing the Demand Constraint Unions will attempt to alter the constraint
increasing labour demand making demand more inelastic
Restricting substitution possibilities collective bargaining influencing public policy
Influence product market supporting quotas, tariffs and restrictions on foreign
competition
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-13
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
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-14
U
Figure 15.5 Efficient and Inefficient Wage-Employment Contracts
DL
A
W
E
B
A’A’’
C
C’Wa
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-15
Contract Curve
Locus of the Pareto-efficient wage-employment outcomes
Union cares about wages and employment
CC must lie to the right of LD curve
Firms and unions are better off negotiating an outcome on the contract curve
Moving up on the CC unions better off Moving down the firm better off
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-16
Obstacles to Reaching Efficient Contacts Information needed may not be
availableAn agreement about employment
difficult to enforceConcession bargaining
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-17
Efficient Versus Inefficient ContractsLabour demand curve model
firm unilaterally sets employmentContract curve
negotiate over wage and employmentMonitoring and enforcing efficient
contracts are too high in most settings
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-18
Figure 15.6 Inefficient, Approximately Efficient, and Efficient Contracts
E
W
C’
C
DLC
DL
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-19
Theory of BargainingPredicting the outcome and explaining
depend factors Common features
Set of possible outcomes Minimum for each party Voluntary agreement Neither will agree to an outcome worse
than minimum
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-20
Figure 15.7 The Bargaining Problem and Nash Solution
F
U
F
U
S A
NUN
fNd
T
d f0
CU0
f1
U1
A
fN
UN
N
f2
U2B
The bargaining problem The Nash solution
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-21
Solutions to the Bargaining Problem
Two bargaining theories process outcome
Nash’s Theory Pareto-efficiency Symmetry Transformation invariance Independence of irrelevant alternatives
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-22
Solutions to the Bargaining ProblemRubinstein’s Theory
some concepts of non-cooperative game theory
bargainers take turns making offers counter offers can be made utility shrinks in each round
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-23
fA
UA
A
BUB
fBf1f2fR
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
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-24
Union Bargaining PowerTwo meanings
power is related to elasticity ability to raise wages
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-25
Union Power and Labour SupplyCraft Unions
raise wage by controlling entry through apprenticeship systems
discrimination, nepotism, high dues and closed shop, union shop, agency shop
Professional Associations occupational licensing and certification
© 2002 McGraw-Hill Ryerson Ltd. Chapter 15-26
End of Chapter Fifteen