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Layoffs with Payoffs: A Bargaining Model of Union Wage and Severance Pay Determination


  • Booth, Alison L


Popular characterizations of union preferences assume that the income of laid-off union members is exogenous. There is evidence, however, of intra-union distribution schemes such as severance payments, unemployment insurance, retraining arrangements and early retirement schemes. This paper develops a model of wage and severance pay determination by a trade union and a firm bargaining in a right-to-manage framework. The important point differentiating the model in this paper from the orthodox union model is that it is efficiency-improving in the sense that it makes full-insurance possible and marginal productivity is equal to the opportunity cost of labour. Moreover, with redundancy pay on the bargaining agenda, both the right-to-manage and the efficient bargaining union models are characterized by the same efficiency conditions. This has implications for empirical research which attempts to distinguish between these two models, since the outcome of both models is the same. Finally, the union-firm bargaining model can also be compared with the outcome of the implicit contract model with redundancy pay. There is an important difference between the two approaches, however. While the result in this paper derives from an imperfectly competitive labour market where unions and firms bargain over wages and redundancy pay, the implicit contract result derives from a perfectly competitive labour market in which competitive forces lead to an efficient outcome.
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Suggested Citation

  • Booth, Alison L, 1995. "Layoffs with Payoffs: A Bargaining Model of Union Wage and Severance Pay Determination," Economica, London School of Economics and Political Science, vol. 62(248), pages 551-564, November.
  • Handle: RePEc:bla:econom:v:62:y:1995:i:248:p:551-64

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    References listed on IDEAS

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    2. Alesina, Alberto & Tabellini, Guido, 1989. "External debt, capital flight and political risk," Journal of International Economics, Elsevier, vol. 27(3-4), pages 199-220, November.
    3. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
    4. Kletzer, Kenneth M, 1984. "Asymmetries of Information and LDC Borrowing with Sovereign Risk," Economic Journal, Royal Economic Society, vol. 94(374), pages 287-307, June.
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    7. Alvin E Roth, 2008. "Axiomatic Models of Bargaining," Levine's Working Paper Archive 122247000000002376, David K. Levine.
    8. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June.
    9. Edwards, Sebastian, 1986. "Country risk, foreign borrowing, and the social discount rate in an open developing economy," Journal of International Money and Finance, Elsevier, vol. 5(1, Supple), pages 79-96, March.
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    Cited by:

    1. Elie Appelbaum, 2009. "Alternating Offers Union-Firm Bargaining: Order of Play and Efficiency," Working Papers 2009_02, York University, Department of Economics.
    2. Christian Grund, 2006. "Severance payments for dismissed employees in Germany," European Journal of Law and Economics, Springer, vol. 22(1), pages 49-71, July.
    3. Pilar García-Martínez & Miguel Malo, 2007. "The strategic use of dismissal legislation: an empirical analysis using Spanish data," European Journal of Law and Economics, Springer, vol. 23(2), pages 151-167, April.
    4. Appelbaum, Elie, 2011. "Union-firm bargaining: Order of play and efficiency," Games and Economic Behavior, Elsevier, vol. 71(2), pages 235-245, March.
    5. Laszlo Goerke, 2002. "Redundancy Pay and Collective Dismissals," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 59(1), pages 1-68, February.
    6. Burguet, Roberto & Caminal, Ramon, 2008. "Does the market provide sufficient employment protection?," Labour Economics, Elsevier, vol. 15(3), pages 406-422, June.
    7. Elie Appelbaum, 2008. "Wages, Fringe Benefits and Efficiency in Union-Firm Bargaining," Working Papers 2008_04, York University, Department of Economics.
    8. Victoria Wass, 1996. "Who Controls Selection under ‘Voluntary’ Redundancy? The Case of the Redundant Mineworkers Payments Scheme," British Journal of Industrial Relations, London School of Economics, vol. 34(2), pages 249-265, June.
    9. Frank Scharr, 2005. "Tarifbindung, Rententeilung und Konzessionsverträge als Einflussgrößen der Lohnhöhe in Unternehmen : eine Untersuchung mit Mikrodaten für thüringische Firmen," ifo Dresden Studien, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 39, October.
    10. Miguel Malo, 2001. "European Labour Law and Severance Pay Determination in Collective Redundancies," European Journal of Law and Economics, Springer, vol. 12(1), pages 73-90, July.
    11. Christian Grund, 2004. "Severance Payments for Dismissed Employees Severance Payments for Dismissed Employees in Germany," Bonn Econ Discussion Papers bgse4_2004, University of Bonn, Germany.
    12. Christian Grund, 2006. "Overcompensation by severance payments," Applied Economics, Taylor & Francis Journals, vol. 38(8), pages 925-930.
    13. Samuel Danthine & Markus Poschke & Stephane Auray, 2016. "Understanding Severance Pay Determination: Mandates, Bargaining, and Unions," 2016 Meeting Papers 967, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings


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