Labor Unions: Concepts, Models, and Public Policies

The classical and neoclassical economic theory posits the existence of a homogeneous labor market for the entire economy. If the labor market is unified, labor in one industry can shift to another industry. In such homogeneous labor markets, the total labor demand and total labor supply determine the economy-wide wage rate. It is possible to revise the abovementioned standard model by introducing industry-specific labor supply. Besides, the equilibrium demand and supply of labor depends critically on the extent of labor organization at the level of the industry. This chapter provides a detailed theoretical structure of the wage bargaining model in the industries, where the unions negotiate with the managers to determine the wage–employment combination. The right-to-manage model and the efficient bargaining model are reemphasized in this chapter to provide an important background for reflecting on the choice of investment in the presence of labor unions. The rent-seeking activities of the labor union are subsequently discussed in view of the declining union participation, globally. We conclude by invoking the complex issues of research and development, hold-up problems, on-the-job training, and employment protection, all in connection with the union models, as the cornerstone of labor and industrial relations.