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)

Pcp

Pmon

Qmon Qc

Minimum wage

P ME

MV

QuantityQm.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….Union Density in Europe

0

10

20

30

40

50

60

Weighted averageof Union Density

Union Density plusstandard deviation

Union density minusstandard deviation

Unions lost bargaining power

Wage share

65

66

67

68

69

70

71

72

73

74

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

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

IC1

IC2

IC3

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)

-20

0

20

40

60

80

100

Aust

ralia

Aust

ria

Belgi

um

Cana

da

Denm

ark

Finlan

d

Fran

ce

Germ

any Ita

ly

Neth

erlan

ds

Norw

ay

Portu

gal

Spain

Swed

en

Swize

rland

UK

USA

1985

1990

1995

2000

free-riding ?Union Membership and Excess Coverage in European Countries

SP

AUT

FR

GER

ITA

NET

BEL

POR

SW

FIN

UK

y = 1.1916x + 32.824

R2

= 0.5605

0

10

20

30

40

50

60

70

80

-20 -10 0 10 20 30 40

Decline in union membership (1980-1995)

Exc

ess

Co

vera

ge

(198

0)

Spearman Rho: 0.5579Level 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 The relationship between bargaining

coordination and real wages (unemployment)

2 Scarpetta (1996)b) 1.8 3.6 Unemployment Real

wage

(unem-

ployment)

Bargaining Coordination

Low Intermediate High

III

II

I

Notes:

I: The effect of internalisation of negative externalities

II: Hump-shaped relationship with small foreign trade

III: Hump-shaped relationship with large foreign trade

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?

0

10

20

30

40

50

60

70

FRANCE GERMANY ITALY SPAIN

mem

bers

as

% o

f em

ploy

ees

Public Utilities Public Administration Manufacturing Services

Union Membership by Contract Type

0

5

10

15

20

25

30

FRANCE ITALY SPAIN

%

Permanent Contract Atypical Contract

The decision to join a unionProbit RegressionDependent Variable: membership of a trade-union

variables coeff sign st.errormale 0.2047 *** 0.0710old -0.0134 0.1098young -0.4783 *** 0.0783left-wing 0.1554 0.0977right-wing 0.0669 0.1045blue collar 0.0439 0.1447white collar -0.0433 0.1349low-income -0.3969 *** 0.1183high-income -0.1257 0.0773compulsory schooling 0.2583 ** 0.1251university -0.1335 0.0969civil servant and university degree 0.2874 0.1937public administration 0.2447 ** 0.1241agriculture -0.1260 0.2295industry -0.0215 0.0836perceived high risk of job loss 0.1150 0.1402france -0.2483 ** 0.0983spain -0.1542 0.1127italy 0.0650 0.1053constant -0.6538 *** 0.1689

Number of observations 1942LR chi2 113.33 ***Pseudo R2 0.0569