Is Collective Bargaining Pareto Efficient? A Survey of the Literature
It would be hard, even today, to deny that labor unions are important economic institutions, and it is this importance that makes their consequences for efficiency so substantial. Interest in the economic analysis of unions was revived in the early 1980s, in large part by a paper by Ian McDonald and Robert Solow which formalized, algebraically and graphically, ideas which were first expressed in the context of labor markets 35 years earlier by Wassily Leontief. The standard textbook model of the labour union treats the union as a conventional monopoly seller of labor, selecting the wage while the firm chooses the level of employment; McDonald & Solow, however, drew from Leontief's work to suggest an alternative in which the firm and union negotiate to a Pareto efficient contract. Further theoretical work followed, and a still-growing empirical literature began to develop, a significant portion of it dedicated to testing McDonald & Solow's model against the traditional labor demand curve theory. A wide variety of empirical procedures and tests have been attempted, with a diverse and contradictory range of findings; given the importance of the question of the efficiency of union contracts, an up-to-date survey of the literature may be useful in synthesizing past results and pointing the way to future research, and it is this role which the current paper will attempt to fill.
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