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Unions in a Frictional Labor Market

  • Leena Rudanko

    ()

    (Department of Economics, Boston University, and NBER)

  • Per Krusell

    ()

    (Stockholm University, CEPR, and NBER)

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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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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