Employment and Unions

APE/ETE Masters Course

Andrew E. Clark (Paris School of Economics - CNRS)http://www.parisschoolofeconomics.com/clark-andrew/

The study of institutions, how we came to have them, and what effect they have on economic outcomes is a growing topic in Economics. And arguably is a move towards a more unified social science (maybe).

• Common or Civil Law• Central Bank Independence• Divorce Law• Minimum Wages/EPL• Trades Unions

I consider the last of these here, and especially wonder about the effect on employment.

Online OECD Employment database http://www.oecd.org/document/34/0,3343,en_2649_33927_40917154_1_1_1_1,00.html#union

5.97.68.1

9.711.3

13.215.015.015.916.817.217.317.517.818.018.218.518.619.320.8

24.025.625.8

28.128.8

35.135.5

37.352.0

54.667.768.870.0

79.4

0 10 20 30 40 50 60 70 80 90

TurkeyFranceEstoniaKorea

United StatesMexico

ChilePoland

SpainHungary

Slovak RepublicCzech Republic

OECD (a)Switzerland

AustraliaNetherlands

GermanyJapan

PortugalNew Zealand

GreeceSlovenia

United KingdomAustria

CanadaItaly

IrelandLuxembourg

BelgiumNorwaySweden

DenmarkFinlandIceland

%

5

10

15

20

25

30

35

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Chile Estonia France

Korea Mexico Spain

Turkey United States OECD (a)

10

20

30

40

50

60

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Czech Republic Germany Greece

Hungary Japan Netherlands

Poland Portugal Switzerland

30

40

50

60

70

80

90

100

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Belgium Denmark Finland

Iceland Luxembourg Norway

Sweden

Let’s meet an old friend: The labour demand curve.

b

LD

Lb

Wages

L

This shows how employment is determined in a competitive market.

The labour demand curve is defined by the choice of employment to maximise profit at a given wage.

LD

0

1

1 > 0

L*

w*

Wages

Derive this formally.

= pF(L) – wL

Along an iso-profit curve, d=0. Totally differentiate:

d = pF’(L)dL – wdL –Ldw = 0

So dw/dL = (pF’(L)-w)/L

dw/dL = 0 where pF’(L) =w, which is the equation of the labour demand curve.

A key difference between workers (labour) and other inputs (land, materials, machinery): workers can express themselves, and bargain. In particular, they cannot be forced to work.

They can form unions.

What are the implications of trades unions for the level of employment? Both at the firm (micro) and the economy (macro) level.

Macro is not micro: representative agents may lead us astray…

Empirical regularities regarding unions.

1) Productivity: a) Higher union wages might “shock” the firm into

being more productive

I used to think of this is being a “bof” argument.

But I have now changed my mind. This is very simply set out in Mayneris et al. (2015)

Higher union wages may yield firrm-level efficiency gains.

Assume that firms have to choose between two production processes:

• A high-tech process with low constant marginal labor requirements but a high fixed adoption cost

• A low-tech process with high marginal labor requirements but no adoption cost.

Higher wages widen the marginal-cost gap between the high- and low-tech technologies.

Keeping quantities constant, the opportunity cost of adopting the high-tech process falls with wages.

Firms which may have previously preferred the low-tech process may switch to paying the fixed cost required for the high-tech process.

Low wages here act as a disincentive for the adoption of more efficient production techniques.

b) Improvements in worker morale and cooperation: union provides a “collective voice” (rather than exit).

Implication of b): labour turnover should be lower amongst union members, ceteris paribus.

c) Protect membership and block innovation (Luddites). Which reduces worker effort (and so productivity)

Empirical evidence from the US has produced only mixed evidence: some positive, some negative.

This is true in both levels and growth

UK evidence suggests a lower productivity level; results in terms of productivity growth are again mixed.

Bear in mind that productivity is famously difficult to measure, and is most often calculated as a residual.

Measure output as Q = f(K, L, M)

Log-linearised as

Q = αlnK + βlnL + γlnM

Productivity measured as Q – Q-hat

Very noisy

2) Capital: The other factor of productiona) Unions tend to be associated with lower levels of physical

investment and R&D.b) But unions are associated with greater levels of worker training

(which is unsurprising if they quit less: they stay longer for the firm to recoup its investment).

3) Working Conditions: A positive effect (unsurprising)

Don’t forget causality. Unions may improve conditions, but poor work conditions predict unionisation too.

Our conditional correlation coefficient here measures the net effect of positive (direct) and negative (selection) phenomena

So that it represents a lower bound of the causal effect.

4) Wages: Unions are associated with higher worker wages; they are also

associated with lower wage inequality (the wage effects of unions are felt most strongly for the low-paid.

There is a direct union effect via their bargaining wages for covered employees.

There are also indirect effects:

• Longer tenure → firm-specific human capital investments • Threat of unionization raises wages in the non-union sector.• Job losses in union sector, resulting in excess labor supply to non-

union sector.

These will affect the wages of both members and non-members

It’s actually not that obvious to come to a conclusion about the union wage effect.

The union wage differential is given by:di=(wi

U-wiN)/wi

N

In practice, we don’t observe the same individual “i” as both a union member and a non-union member. We thus compare across individuals:

d=(wU-wN)/wN

Problem is that union members (who give us the wU) might have very different observed and unobserved characteristics to non-union members (who supply the wN figure).

i.e. There is omitted variable bias.

Typically estimate

Ln wage = γU + βX + ε

Ln wage = γU + βX + ε

We then then have (total differentiation) dw/w = γdU

So that the elasticity of wages w.r.t. unions is

dw/dU x U/w = (γw/w) x 1 = γ

This is a partial equilibrium estimation. In practice the wage of non-union members will be determined by some regression as well.

And the probability of union coverage will be some function of the difference between union and non-union wages.

Difficult to do this well: need an exogenous change in union membership (that does not directly affect wages).

Estimates of the mark-up in the UK are around 7-12%.

The wage premium in the UK and the US has been pretty stable over time.

• Unions have persisted in high mark-up sectors• Weaker unions reduce non-union wages too• Rising competition will not affect industries

with market power or the State sector.

The union wage effect is higher for manual and low-skilled workers (wage compression, as noted above).

The union wage premium has been suggested as one reason why union density has been falling (wage effect larger than the productivity effect) – but this doesn’t explain why the mark-up hasn’t faded away above.

Another is the change in industrial composition.

A third is “institutional”: change in the legal environment, worker preferences, government regulation of the labour market.

5) Job Satisfaction: Typically found to be negative. • Careful of causality (desire for union representation

is negatively correlated with satisfaction)• Are union jobs really worse, or do unions just allow

people to moan more (give them a voice)? Test this via an objective correlate of satisfaction: quits.

Model:quit = q(X, satisfaction, union, union*satisfaction).

What happens when workers unionise?Union utility function:

U =Lu(w) + (M-L)u(b)

M is union membership, L is employment of union members. Totally differentiate for the indifference curve:

dLu(w) + Lu’(w)dw – u(b)dL = 0

So dw/dL= -[u(w)-u(b)]/Lu’(w)

Utility increases North-Westwards. Negatively-sloped as long as u(w) > u(b): indifference curves become horizontal at w=b.

b

Wages

L

I0

I1 I2

1) MONOPOLY UNIONThe union makes all of the decisions here, by choosing

both the level of wages and the level of employment, subject only to the constraint that the final point be on the labour demand curve.

Models of Union Behaviour

Wages

L

I0

I1 I2

LD

LMU

wMU

2) RIGHT TO MANAGEMore realistic. Employment is chosen by the firm, wages

are bargained over.Nash bargaining solutionMax B = [Lu(w)+(M-L)u(b)][pF(L)-wL] 1-

w

s.t. the labour demand curve (pF’(L)-wL)

The parameter reflects the union’s relative bargaining power.

If =0 then the firm has all the bargaining power;If =1 then the union has all the bargaining power;

Wages

L

I1

LD

wMU=1: Monopoly Union

b=0: Competitive (no union)

RTM solution is somewhere along the LD curve, between wMU and b.

Both the Monopoly Union and the RTM models have the implication that higher wages are associated with lower employment: because we are moving up and down the labour demand curve.

All of the MU/RTM solutions are on the labour demand curve. All of these solutions are (in general…) inefficient.

We therefore turn to the….

3) EFFICIENT BARGAIN

Here both wages and employment are negotiated between the firm and the union. We have the same Nash maximand as above, but now maximised over both w and L.

The EB reflects the general principle that for efficiency, we should always bargain over all of the elements upon which our utility depends.

Only let others decide when we do not care (when our utility does not depend on them).

Wages

L

I1

LD

wMU

1

I2

Efficient points are given by the tangent between the IC and the iso-profit curve. At any other point, we can make one of the firm and the union better off without making the other one worse off.

Tracing these out produces an upward-sloping curve in (w, L) space.

Note that when indifference curves are flat, the tangent to the iso-profit curve will be on the labour demand curve. This is true at w=b.

The MU point is inefficient

An EB point is not

Wages

L

I1

LD

wMU

1

b

0

CC

CC = the Contract Curve

In the EB model, there is a positive relationship between wages and employment. Moving up the CC curve implies greater union bargaining power. The union takes part of the payoff of more power in wages, part in employment.

The problem with the EB is that it doesn’t seem to describe the real world very well. While unions do negotiate over wages, they most often probably don’t negotiate over employment.

Therefore in most of the bargains that we observe, higher wages are associated with lower employment. As we now that unions are associated with higher wages, surely it’s a no-brainer to say that they reduce employment?

The Macroeconomics of Trade UnionsThe microeconomic analysis above was partial equilibrium. We didn’t consider

the effect of one firm’s wage and employment decisions on other firms.

In the macro analysis, we will take these effects on board. This changes the results.

Consider an economy with trade unions. There are a number of different dimensions along which we can describe the “degree of unionisation” of that economy.

1) The percentage of workers who are union members (Union Density)

2) The percentage of workers who have their pay and working conditions decided by union bargaining (Collective Bargaining Coverage)

3) How many unions there are

4) At which level do unions bargain: firm, industry, economy? (Degree of centralisation)

5) Do different unions coordinate their bargaining activities? (Degree of coordination)

Inspiration for this literatureThe wildly different macro performances of OECD countries in

the 1970s and 1980s following the first two oil-price shocks.

Some, such as Japan, Austria and the Nordic countries, seemed to have levels of unemployment and inflation that were persistently lower than those in other countries.

The bad pupils: the rest of Western Europe, and North America.

Different macro performance could come from macro variables (interest rates, exchange rates…)

…or from institutions. We here particularly think of trades unions.

The initial focus of this work was on bargaining centralisation. This can range from the establishment-level right up to the country level.

Establishment

Firm

Branch/

Industry

Country

OECD countries operate at wildly-different points on this scale: see my attempt at a ranking in Table 3.3. of the Employment Outlook chapter. Nordics to the right; N. America to the left; much of Western Europe in the middle

There is movement between countries, and within countries over time.

So what?We are interested in this because of its potential impact on

economic performance.

A distinction (vastly oversimplified):

• “Eurosclerosis” school: centralised bargaining is a rigidity which prevents labour markets from clearing

• “Corporatists” believe that centralised institutions may help us to overcome market failure.

Both imagine a linear relationship between bargaining centralisation and performance: this assumption was challenged in a well-known paper by Calmfors and Driffill in Economic Policy in 1988.

CD do think that there is a ranking in terms of centralisation and economic performance; they just suggest that the middle is worse than the two ends.

Initial analysis carried out in terms of the unemployment rate.

CentralisationBased on two key elements: the first is externalities.

Unem

ployment

ExternalitiesAre others hurt by the higher wage a union bargains for its

members?

My members receive higher wages, and are thus happy.

What about others?

Calmfors (1993) identifies six potential routes via which higher wages for a union might reduce the utility of those not covered by the bargain.

1) Consumption prices (lower real wages)

2) Input prices

3) Fiscal effect (have to pay for others’ unemployment)

4) Unemployment (less chance of getting another job if you are yourself unemployed).

5) Relative utility: u=u(y/y*)

6) Efficiency wages. If e=e(y/y*), then effort by uncovered workers will fall.

Suppose that individuals are not altruistic. To what extent will these externalities be taken into account?

Decentralised bargaining will take none of them into account: those who profit from higher wages represent only a small percentage of those who are hurt by them.

As we move from left to right on the centralisation scale, negations cover a greater percentage of people: we take more notice of the costs of higher wages relative to their benefits.

At the logical extreme, if we bargain for everyone in the country, then those who profit and those who are hurt are the same people: externalities are internalised.

Internalising externalities leads to wage moderation. The relationship between centralisation and wages is negative, therefore so is that between centralisation and unemployment.

CentralisationThe second key element is the price elasticity of demand, which

determines the derived elasticity of labour demand.

Unem

ployment, w

ages

By what percentage will employment fall if wages rise by 10%?

Monopolists pass all of the wage increase onto prices, if demand is totally inelastic, so there is no employment effect.

As the number of rival products or substitutes rises, the price elasticity of demand rises, and so does the elasticity of labour demand.

Under perfect competition, only a slight increase in wages and thus price leads the firm to lose all of its market.

Price elasticity imposes market discipline: the lower is the level of centralisation, the more market substitutes there are, the greater is the elasticity. Decentralisation brings wage moderation

Centralisation

Put these two elements (internalisation and elasticity) together and you’ve got what?

CD argue that this produces a hump-shaped relationship between unemployment and centralisation.

I reckon they might be right; but I also think it could produce all kinds of other shapes too.

Unem

ployment, w

ages

Let’s take it to the data to decide.

CD used four performance indicators.

• Unemployment rate

• Employment rate

• Okun Index (unemployment plus inflation rates)

• API (unemployment plus current a/c deficit as % of GDP)

17 OECD countries, 1974-1985.

Classified according to centralisation of the collective bargaining system; split up into three groups.

First two columns in each panel of Table 3.2 show CD’s results.

Note jacknife-style worries about the classification of Switzerland

Unemployment rate

Centralised best; unemployment is hump-shaped.

Less obvious when updated.

Employment rate

U-shaped in 1974-’85. Less obvious when updated.

Okun Index

Not U-shaped.

API

Sort of hump-shaped, perhaps.

Drawbacks of CD

No statistical testing. Some of these means (many?) are not significantly different from each other.

Doesn’t take into account density, CB coverage or coordination.

Countries are assumed to have the same classification over a 20-year period, even though there is substantial movement.

Update CD to mid-90’s. Add Spain and Portugal. And run regressions.

Classifications of countries in Table 3.3.

A) TU Density.

France is strange. TU density has been drifting downwards.

OECD Trade Union Density: 1980 1990 1994

46% 40% 40%

B) CB coverage is usually greater than membership. See Figure 3.1.

OECD Collective Bargaining Coverage: 1980 1990 1994

72% 70% 68%

C) Centralisation. Higher in Nordic countries; lower in Canada, Japan, NZ and the US.

A decentralisation tendency in the UK, Australia, Denmark and NZ.

A centralisation tendency in Italy and Portugal.

D) Centralisation is no use if centralised agreements are renegotiated at more local levels. Take union coordination into account. This is higher in Austria, Germany and Japan; lower in Canada, the UK, NZ and the US.

A tendency towards less coordination.

One of the big issues in this literature has been the wild proliferation of indices.

There are as many indices of country bargaining regimes as there are authors, I reckon.

Happily, they do seem to be pretty well correlated (see Table 3.4).

Simple correlations

I have five macro performance indicators (five-year averages)

• Unemployment rate

• Employment rate

• Inflation

• Real wage growth

• Wage inequality

Table 3.5 shows Spearman rank correlation coefficients. Thus looking for a linear relationship. Not much comes out of that (although unions associated with less wage inequality).

To identify non-linearities, recode rank. Instead of

1, 2, ….., 18, 19

use an ascending-descending rank (middle worse or better than ends?):

1, 2, …, 8, 9, 10, 9, 8, ….2, 1.

Any positive correlation implies middle-ranked countries have more of whatever it is we’re looking at than the ends do.

Only result: a hump-shape with inflation, but even this goes away by 1994.

Pooled Regressions.

Make up dummies for centralised/coordinated and intermediate. Countries can change classification over time.

OLS regressions in Table 3.6. 57 observations.

TU membership: + E, - inequality

CB coverage: + unemployment, inflation, -E

Centralised: - unemployment, inflation, inequality

Intermediate: - inflation, inequality.

What a mixed picture. One thing we can say is that there is no evidence of a multivariate hump-shape.

Strong inequality result.

Is centralised best after all?

Fixed-Effect Regressions.

Look at changes within one country over time.

See Figure 3.2. What happened to countries that decentralised/became less coordinated?

Unemployment rose, employment fell, and inequality rose.

Conclusion: • Micro union theory suggests that higher wages increase

unemployment.• Macro theory suggests that there is a hump-shape with respect to

centralisation.• Difficult to find clear evidence.

• Unions certainly raise wages. But they might raise productivity too (human capital, discourage quits, voice leading to higher effort). So we’re still on the labour demand curve, but the whole thing has shifted to the right.

• We have considered only price-taking firms. When firms have market power, then the effect of wages on employment is not so clear (see Alan Manning’s Monopsony work).

• All the empirical literature is probably flawed anyway: unionism is not exogenous. Find a good instrument (recognition ballots?)

Am I out of date? • Is anyone really interested in unions anymore anyway?• To put it another way, will North American journal editors

publish me if I work on this?

Your Journal Editor Lives Here…

5.87.710.311.913.614.315.616.816.817.417.818.218.318.618.919.120.220.420.824.027.127.128.932.333.4

37.451.953.3

67.567.668.3

86.4

0 10 20 30 40 50 60 70 80 90 100

TurkeyFranceKorea

United StatesChileSpain

PolandHungary

Slovak RepublicMexico

OECD areaJapan

SwitzerlandAustralia

NetherlandsGermany

Czech RepublicPortugal

New ZealandGreece

United KingdomCanadaAustriaIreland

ItalyLuxembourg

BelgiumNorwayFinland

DenmarkSwedenIceland

%

0

10

20

30

40

50

60

70

19601964

19681972

19761980

19841988

19921996

20002004

2008

Union density is certainly in free fall in the US. • 2014 BLS figures. 14.6M union members in

the US (11.1%); 15.9M covered workers (12.5%).

• Private union density is now 6.6% (public sector density is 36%).

• But that’s not so true in Europe.• One phenomenon which is on the rise in the

US is licensed occupations.

• Occupations are becoming increasingly restricted.

• Have to meet certain standards to practice the profession

• Or have to be certified to use the job title (others can carry out same duties, but not use the job title).

• As such, there are restrictions on entry and the supply of labour

• Which increases the price of services and wages.• Applies to Dentists and Doctors (thank

goodness)... and Lawyers.• But also to hairdressers and florists

• Licensed Occupations now account for over 20% of jobs. Great deal of inter-State variation: from 5% in Kansas to 30+% in California.

• There is huge State variation in union density in the US as well, from New York (25%) to North Carolina (2%) [figures for Kansas and California are 7.4% and 16%]

• Argument for licensing is that it increases the quality of service.

• Yet Kleiner finds no cross-State difference in customer complaints in occupations that are licensed in Wisconsin, but not in Minnesota.

• Equally insurance premia for malpractice by medical practitioners are the same in licensed and unlicensed States.

• Licensing is associated with restrictions on labour supply, however (reduced the growth rate of employment by about 20%).

• Consequently led to higher wages (10-17%): sound familiar?

Postcript

Two questions about institutions

i) What effect do institutions have on outcomes?ii)Why do we have institutions in the first place?

There are likely factors, Z, which help bring about institutions.

We have an empirical problem if the same Z have a direct effect on outcomes too.