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Unions as Commitment Devices: Strong Unions are Welcome

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  • Kyota Eguchi

    (Faculty of Economics, University of Tokyo.)

Abstract

Under incompleteness of contracts, we consider one role of unions to be as a commitment device. When wage and dismissal rate contingent on the states are not described in labor contracts, although a wage offer is verifiable, the firm cannot promise to keep employment ex ante and cannot make employees believe the promise of job security. Thus, the firm must offer a high wage to encourage workers in accumulating skills. However, if strong unions exist and resist the firm's dismissal policy, unions can play a significant role as commitment devices for job security. Then, since the firm can decrease wage and increase employment level, we can expect the profit of the firm with the strong union to be more than that without a union. Therefore, strong unions would be welcome. Furthermore, we consider the possibility of wage adjustment as renegotiation in a recession, and show that wage adjustment occurs in slightly severe recessions, but that under severe recessions dismissal of employees cannot be avoided.

Suggested Citation

  • Kyota Eguchi, 1999. "Unions as Commitment Devices: Strong Unions are Welcome," CIRJE F-Series CIRJE-F-46, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:99cf46
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