Effect of the Union under Moral Hazard

We consider why blue collar workers are more likely to organize unions than white collar workers from a view of commitment devices and the moral hazard problem. Under contractual incompleteness, a firm cannot promise to keep employment level high ex ante. However, if unions resist firms' dismissal policies, unions can play a significant role as commitment devices for job security. Then, since firms can decrease wage and increase employment level, the profit of firms with unions can be more than that without unions. Furthermore, we show that asymmetric information on workers' actions weakens the role of unions as commitment devices. The result explains the above question since efforts level of white collar workers is difficult to observe.