macro chapter 12 trade unions summary

In most European countries trade unions are widespread and large and even in countries
where only a small fraction of workers are organized in unions, the agreements that trade
unions enter into are often extended to cover a large part of the labour market. Furthermore,
empirical investigations show that union members have higher wages than (otherwise comparable)
non-union members. Unions thus seem to be important for wage determination.
2. Unions are involved in regulating many equally important working conditions, but this chapter
concentrated on economic models where trade unions only have a role as wage setters. The
models focused on monopoly unions with a market power so strong that they can dictate the
wage rate to employers. In most respects, a model where employers are also assumed to
have some market power generates the same qualitative results as the monopoly union
model.
3. Under plausible assumptions, a union seeking to defend the interests of its members will want
to maximize the expected, or long-run average, income of its representative members. This is
equivalent to maximization of the total union 'rent', defined as the excess of the union wage
over the income members could obtain elsewhere in the economy times the number of
employed union members enjoying this excess.
4. In a partial equilibrium labour market model where firms have given revenue curves leading to
downward-sloping labour demand curves, the wage rate set by the union to maximize the
union rent could well be so high that labour demand falls short of the labour supplied by union
members. The resulting unemployment is involuntary at the ind vidual level, but voluntary from
the collective long-run perspective of all union members, since the wage rate set by the union
maximizes the long-run average income of the representative member. Those who are currently
unemployed may have an interest in undercutting the wage set by the union in the short
run, but if such undercutting leads to a breakdown of the union, the members are better off
abstaining frorr undercutting. Trade unions thus face a 'cartel problem' like any other cartel.
We assumed throughout the chapter that the union could impose sufficient discipline among
its members to avoid breakdown due to the cartel problem.
5. If the labour rrarket equilibrium in the partial equilibrium model with trade unions implies
unemployment, shocks to the firms' revenue curves will have no impact on the real wage, but
will be fu lly absorbed by fluctuations in employment and output, as long as the outside option
(the income that union members can obtain elsewhere in the economy) is unaffected by the
shocks. The trade union model may thus help to explain the business cycle fact that employmP.
nt is muc:h morP. c:losP.Iy c:orrP.I~tP.rl with outrut th~n rP.~I w~gP.s ~rP..
6. The theory of monopoly union behaviour may be incorporated in a macro model with many
production sectors and monopolistic competition and with a trade union in each sector. In
such a general equilibrium model firms' revenues arise from consumer demand, and the
outside option viewed from each production sector is a weighted average of the unemployment
benefit and the general wage level, where the weights are given by the rate of unemployment.
In a symmetric equilibrium the wage set by each union equals the general wage
level, and the real (relative) output price of each sector is 1. Moreover, the equilibrium necessarily
involves unemployment. The individual trade union can only create some rent for its
members if there is a positive unemployment rate since, in the absence of unemployment, the
wage set by each union equals the outside option.
7. In the general equilibrium macro model with trade unions the level of structural unemployment
will increase if the market power of trade unions in the labour markets increases, if the market
power of firms in the product markets goes up, or if the level of unemployment benefits is
raised. These results are of obvious importance for labour market and competition polic ies.

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