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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. 5 different types of minimum wages in Europe: Government legislated

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Minimum Wages and Unions

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  1. 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

  2. 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

  3. 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%)

  4. 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

  5. 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)

  6. P ME Pcp Minimum wage AE Pmon MV Qm.w. Qmon Qc Quantity

  7. 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

  8. 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

  9. 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?

  10. Unions • Not immanent feature of the European landscape • Declining membership • Widening cross-country differences in union presence • Increasing “excess coverage

  11. De-unionisation….

  12. Unions lost bargaining power

  13. 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)

  14. Wages IC3 IC2 IC1 Workers, e Unions indifference curves

  15. 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

  16. Monopoly union outcome

  17. 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

  18. 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)

  19. Equilibrium

  20. 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

  21. 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

  22. “Excess coverage” (coverage - membership)

  23. 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)

  24. 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

  25. Centralisation of bargaining

  26. 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

  27. Are Unions stronger in sheltered sectors?

  28. Union Membership by Contract Type

  29. The decision to join a union

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