Minimum Wages and Unions Outline Minimum wages Unions presence and influence Theories of the effects of unions –Monopoly union –Right to manage model Models of endogenous union membership

Minimum wages 5 different types of minimum wages in Europe: –Government legislated –Contracted nationally –Contracted at the industry-level (and extended erga omnes) –Contracted at the industry-level (only for union members) –Statutory,but confined to specific industries- jobs

Binding? Kaitz Index: minimum wage as a proportion of the average wage Dolado et al.: MINWA did not increase significantly throughout Europe in the last 30 years (constant at about 60%)

Problems with the Kaitz Index –Increase in the minimum wage may increase also the average wage leaving the KI unchanged –Concerns the structure of wages rather than dynamics of real and nominal wages –Does not take into account differences in tax rules for high-low wages

Effects of minimum wages In competitive labour markets as well as under matching frictions and monopoly union, MINWA reduce employment Can increase E only in monopsonistic labour markets (how frequent? when is the employer a wage-maker?) Or with efficiency wages (MINWA as a disciplinary device)

P cp P mon Q mon QcQc Minimum wage PME MV Quantity Q m.w. AE

Empirical evidence Different from country to country (see Dolado et al.) Negative effects on employment, notably among youngsters However, less and less young among MINWA recipients and more and more women and temporary workers

But Card and Krueger (1994) found that MINWA in New Jersey did not reduce E at fast-food restaurants Actually some increase Some of the burden passed to consumers Difficult to reconcile either with competitive and monopsonistic models

Thus… MINWA essentially as redistributive device Issue of policies reducing low-pay and poverty Then better to index MINWA to prices rather than wages Role of MINWA in decentralising collective agreements?

Unions Not immanent feature of the European landscape Declining membership Widening cross-country differences in union presence Increasing excess coverage

De-unionisation….

Unions lost bargaining power

Models of unions Unions and management: Government exogenous to the game Objectives of unions: degree of representation of outsiders; internal structure; likelihood of principal-agent problems Objects of bargaining: wages and employment U=U(w,e) where e is the employment rate in the expected utility version: EU= e U(w) + (1-e) U(b)

Unions indifference curves IC 1 IC 2 IC 3 Workers, e Wages

Monopoly union model Union sets wages unilaterally so that to maximise the expected utility of a representative worker subject to the labour demand of the firm The firm reads off the employment level corresponding to w No bargaining takes place Union as closed shop

Monopoly union outcome

Equilibrium First-order condition: = w u(w)/[u(w)-u(b)] that is, elasticity of labour demand,, is equal to % change in utility associated with % change in unions wages

Right-to-manage model Union and firms bargain over any surplus Nash-bargaining: max of product of bargaining surplus of workers and firms weighted by respective bargaining strenghts ( and (1- )) Gains as surplus over fallback option For the firm, the fallback option is zero For the union member is u(b)

Equilibrium

Comparing the 2 equilibria Monopoly union = w u(w)/[u(w)-u(b)] Right-to-manage = w u(w)/[u(w)-u(b)] - (1- ) [w e/(p q(e)-we)] Note: when =1, RTM=MU, when =O, RTM=competitive

What else do unions do? Non-wage compensation and working conditions Compression of wage inequalities (rationale: ideology, insurance, savings on negotation costs) Provision of services to their members as a way to solve the free-rider problem Political role

Excess coverage (coverage - membership)

free-riding ? Union Membership and Excess Coverage in European Countries SP AUT FR GER ITA NET BEL POR SW FIN UK y = x R 2 = Decline in union membership ( ) Excess Coverage (1980) Spearman Rho: Level of Significance: 10%

Levels of bargaining National Industry-level Plant-level Trade-off between internalisation of externalities (and bargaining costs) and capacity to adapt to idyosincratic productivity shocks

Centralisation of bargaining

Endogenous membership Decision to join a union If costs (membership fees) lower than benefits Given union wage compression, low-skilled types are more likely to join a union (also those with more rents to split) Insiders and outsiders

Are Unions stronger in sheltered sectors?

Union Membership by Contract Type

The decision to join a union