Working Paper: CEPR ID: DP1232
Authors: Michael C. Burda
Abstract: Existing theories of unions emphasize their impact on wage levels relative to the opportunity cost of leisure. This paper explores the possibility that monopoly unions provide income insurance against idiosyncratic wage variability. An optimal union contract is characterized by real wage and other types of flexibility only in response to systematic changes in underlying uncertainty. Under such conditions, there is no presumption that the `union wage premium' relative to the free market wage is positive. The model shows the effect of unemployment benefits, average productivity, and risk on the desirability of union membership, and offers an economic interpretation of equity and solidarity in union policy. It can also explain the negative correlation between inequality and unionism in developed countries.
Keywords: Wage Differentials; Implicit Contracts; Labour Unions; Insurance
JEL Codes: J31; J41; J50; J61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monopoly unions (J51) | reduced wage variability (J31) |
| increase in productivity (O49) | wage increases across all states of the world (J39) |
| union wage premium (J31) | compensating for the risk of unemployment (J65) |
| external factors (unemployment benefits, average productivity) (E24) | desirability of union membership (J50) |
| union policies (J58) | labor market outcomes (J48) |
| centralized bargaining settings (J52) | enhanced member welfare (I30) |