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Unions in a Frictional Labor Market

  • Per Krusell
  • Leena Rudanko

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, assuming it to care equally about employed and unemployed workers, to treat identical workers in identical jobs the same, as well as to be fully rational, taking job creation into account when making its wage demands. Under these assumptions, if the union is able to fully commit to future wages, it achieves an efficient level of long-run unemployment. In the short run, however, the union raises current wages above the efficient level, in order to appropriate surpluses from firms with existing matches. The union wage policy is thus time-inconsistent. 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 leads to increased volatility in the labor market. We consider extensions to partial unionization and collective bargaining between the union and an employers' association.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18218.

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Date of creation: Jul 2012
Date of revision:
Handle: RePEc:nbr:nberwo:18218
Note: EFG LS
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  1. Krusell, Per & Smith Jr., Anthony A, 2001. "Consumption-Savings Decisions with Quasi-Geometric Discounting," CEPR Discussion Papers 2651, C.E.P.R. Discussion Papers.
  2. repec:cen:wpaper:12-12 is not listed on IDEAS
  3. Ebell, Monique & Haefke, Christian, 2006. "Product Market Regulation and Endogenous Union Formation," IZA Discussion Papers 2222, Institute for the Study of Labor (IZA).
  4. Guido Menzio & Shouyong Shi, 2009. "Block Recursive Equilibria for Stochastic Models of Search on the Job," PIER Working Paper Archive 09-005, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  5. 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.
  6. Delacroix, Alain, 2006. "A multisectorial matching model of unions," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 573-596, April.
  7. Baris Kaymak & Omer Acikgoz, 2011. "The Rising Skill Premium and Deunionization in the United States," 2011 Meeting Papers 1433, Society for Economic Dynamics.
  8. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
  9. 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.
  10. 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.
  11. 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.
  12. 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).
  13. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  14. Per Krusell & Fernando M. Martin & Jose-Victor Rios-Rull, 2006. "Time Consistent Debt," 2006 Meeting Papers 210, Society for Economic Dynamics.
  15. Garey Ramey & Wouter J. den Haan & Joel Watson, 2000. "Job Destruction and Propagation of Shocks," American Economic Review, American Economic Association, vol. 90(3), pages 482-498, June.
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