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Unions in a Frictional Labor Market

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  • Leena Rudanko

    ()
    (Department of Economics, Boston University, and NBER)

  • Per Krusell

    ()
    (Stockholm University, CEPR, and NBER)

Abstract

We analyze a labor market with search and matching frictions where wage setting is controlled by a monopoly union. We take a benevolent view of the union in assuming it to care equally about employed and unemployed workers and we assume, moreover, that it is fully rational, thus taking job creation into account when making its wage demands. Under these assumptions, if the union is also able to fully commit to future wages it generates an efficient level of long-run unemployment. However, in the short run, it uses its market power to collect surpluses from firms with existing matches by raising current wages above the efficient level. These elements give rise to a time inconsistency. Without commitment, and in a Markov-perfect equilibrium, not only is unemployment well above its efficient level, but the union wage also exhibits endogenous real stickiness which amplifies the responses of vacancy creation and unemployment to shocks. We consider extensions to partial unionization and collective bargaining between a labor union and an employers’ association.

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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2012-014.

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Length: 49 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:bos:wpaper:wp2012-014

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Keywords: Labor unions; frictional labor markets; time-inconsistency;

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References

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  1. Per Krusell & Burhanettin Kuruscu & Anthony A. Smtih, Jr., . "Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting," GSIA Working Papers 2001-06, Carnegie Mellon University, Tepper School of Business.
  2. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
  3. Menzio, Guido & Shi, Shouyong, 2010. "Block recursive equilibria for stochastic models of search on the job," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1453-1494, July.
  4. Modesto, Leonor & Thomas, Jonathan P., 2000. "An Analysis of Labour Adjustment Costs in Unionized Economies," IZA Discussion Papers 225, Institute for the Study of Labor (IZA).
  5. Baris Kaymak & Omer Acikgoz, 2011. "The Rising Skill Premium and Deunionization in the United States," 2011 Meeting Papers 1433, Society for Economic Dynamics.
  6. Wouter J. den Haan & Garey Ramey & Joel Watson, 1997. "Job Destruction and Propagation of Shocks," NBER Working Papers 6275, National Bureau of Economic Research, Inc.
  7. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  8. repec:cen:wpaper:12-12 is not listed on IDEAS
  9. Per Krusell & Fernando M. Martin & Jose-Victor Rios-Rull, 2006. "Time Consistent Debt," 2006 Meeting Papers 210, Society for Economic Dynamics.
  10. Emin M. Dinlersoz & Jeremy Greenwood, 2012. "The Rise and Fall of Unions in the U.S," NBER Working Papers 18079, National Bureau of Economic Research, Inc.
  11. Card, David, 1986. "Efficient Contracts with Costly Adjustment: Short-run Employment Determination for Airline Mechanics," American Economic Review, American Economic Association, vol. 76(5), pages 1045-71, December.
  12. Ebell, Monique & Haefke, Christian, 2006. "Product Market Regulation and Endogenous Union Formation," IZA Discussion Papers 2222, Institute for the Study of Labor (IZA).
  13. Delacroix, Alain, 2006. "A multisectorial matching model of unions," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 573-596, April.
  14. Booth, Alison & Schiantarelli, Fabio, 1987. "The Employment Effects of a Shorter Working Week," Economica, London School of Economics and Political Science, vol. 54(214), pages 237-48, May.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Unions just cannot help it
    by Economic Logician in Economic Logic on 2012-08-09 14:24:00
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Cited by:
  1. Emin Dinlersoz & Jeremy Greenwood, 2012. "The Rise and Fall of Unions in the U.S," Economie d'Avant Garde Research Reports 19, Economie d'Avant Garde.
  2. Cai, Xiaoming & Gautier, Pieter A. & Teulings, Coen N. & Watanabe, Makoto, 2014. "Collective versus decentralized wage bargaining and the efficient allocation of resources," Labour Economics, Elsevier, vol. 26(C), pages 34-42.
  3. Camilo Alberto Cárdenas Hurtado & María Alejandra Hernández Montes & Jhon Edwar Torres Gorron, 2014. "An Exploratory Analysis of Heterogeneity on Regional Labour Markets and Unemployment Rates in Colombia: An MFACT approach," Borradores de Economia 802, Banco de la Republica de Colombia.
  4. Xiaoming Cai & Pieter A. Gautier & Makoto Watanabe, 2012. "Collective versus Decentralized Wage Bargaining and the Efficient Allocation of Resources," Tinbergen Institute Discussion Papers 12-086/3, Tinbergen Institute.

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