Labor Union

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Labor Union

A labor union is typically an association of wage and salary earners aimed at improving the welfare of its associates through raising the bargained wage above the competitive level, improving working conditions, and preserving occupational levels. These aims can be achieved by unions using a number of strategies, according to the institutional framework under which unions and employers operate, general economic conditions, and political economy considerations.

In most industrialized economies, wages are largely determined through collective agreements between unions and employer confederations. Total output is shared between the two parts according to the relative bargaining power. These agreements are usually binding for a proportion of total employees that does not include union members only. The proportion of contracts usually covered by collective agreements is known in the literature as union coverage. The membership rate among wage and salary earners is referred to as union density .

The bargaining process may take place at the firm, industry, regional, or national level and may involve other issues, such as the work schedule, working conditions, holidays, and training. The attitude of unions during the bargaining process may differ, according to how much they internalize the consequences of the bargaining decisions on the economy as a whole. This amounts to unions being more or less coordinated with employer confederations in defining bargaining outcomes that can be beneficial or detrimental for economy-wide growth and welfare. Alternatively unions may adopt bargaining strategies aimed at improving the welfare of their associates only, regardless of the consequences on the economic system. For example, unions mainly representing insiders—that is, employed workers—may bargain for a higher wage, therefore improving the welfare of associated employees, despite the adverse effect on outsiders, including the unemployed and new entrants in the labor market.

Sometimes unions’ actions and organization may be defined and managed under specific regulations. For example, in the United States public sector workers do not have the right to strike, while in other countries certain limitations apply in order to guarantee a minimum amount of public services during collective actions. Other regulations apply to the collection and management of union dues. For example, all employees may be required to pay union dues within a fixed period of time after hiring, although unions may be limited in their ways of spending financial resources collected from nonmembers.

One possible representation of union preferences is based on the assumption that union members are identical. The union objective function consists then of the expected utility of the representative member. This amounts to the utility associated, respectively, to the state of employment and unemployment, that is, by the real wage W and the reservation wage W, weighted by the probability of being in each of the two states. With N and L being, respectively, the labor force and the employment level, and v(·) an indirect utility function, this can be written as with v’(W) >0; v’’(W)≤0.

Union members are, however, typically heterogeneous. In this case, the union objective function will depend on the mechanisms regulating the functioning of the union. If unions are perfectly democratic organizations, then their objectives will typically depend on the preferences of the median member. However, because they are collective organizations, unions respond to political economy incentive structures, like firms and political parties, and their leaders may be assigned discretionary power. In this case, union leaders may operate for objectives that are different from their organization’s statutory objectives.

Wage-bargaining models can be classified into two main theoretical frameworks, known in the literature as right to manage and efficient bargaining. Under the right-to-manage approach, unions and firms bargain over the wage, with firms setting labor demand given the bargained wage. As a result, the bargaining outcome will always be on the labor-demand curve. This approach can be rationalized under a simple Nash framework, with the bargained wage W^* being the result of the following maximization problem: max B = V (W )γII(W )^1-γ, where V(W)

and II(W ) are, respectively, the bargaining outcome gains for unions and firms, and γ(with 0 <γ < 1) is the bargaining power of unions. A higher wage will increase the employed workers’ utility, but at the same time it will lower the firms’ profits per worker as well as the aggregate employment level.

Under the efficient bargaining approach, it is shown that unions and firms can reach bargaining outcomes that are Pareto-improving with respect to the right-to-manage hypothesis. The bargaining equilibrium is then located on the contract curve, that is, on the locus of the tangency points between firms’ isoprofit curves and unions’ indifference curves. The exact location of the equilibrium on the contract curve will depend on the relative bargaining power γ. The empirical evidence is mainly consistent with the first setting.

Historically, in many industrialized countries, union density rates have increased especially during the expansion of the industrial sector. Recent decades, characterized by a declining industrial sector and the development of a service-oriented economy in many advanced economies, have witnessed heterogeneous patterns in union density rates, with a decline in some countries and an increase in others. These patterns seem to have followed the general institutional settings prevailing in each country as well as the ability of unions to adapt their objectives and strategies to new economic environments. As a result union density rates across Organization for Economic Cooperation and Development (OECD) countries display a significant amount of variation, from a minimum of around 10 percent in France, the United States, and Spain in 2001 to a maximum of around 80 percent in Finland and Sweden. The same is true for union coverage that ranges from a minimum of 14 percent in the United States to above 90 percent in Austria, Belgium, Finland, France, and Sweden. Even within the same country, unions are characterized by different membership rates across sectors. For example, in the United States private sector unions represent around 8.5 percent of workers, whereas public sector unions represent around 30 percent of workers in their sector.

SEE ALSO Game Theory; Labor; Negotiation; Unions; Wages