The topics discussed in this chapter are wage and employment determination under collective bargaining. This chapter includes contents: Union behaviour, interaction between firms and unions, inefficient production decisions, inefficient union practices, bargaining power. | Chapter Fifteen Wage and Employment Determination Under Collective Bargaining Created by: Erica Morrill, Fanshawe College Chapter 15- © 2002 McGraw-Hill Ryerson Ltd. Chapter Focus Union behaviour Interaction between firms and unions Inefficient production decisions Inefficient union practices Bargaining power Chapter 15- © 2002 McGraw-Hill Ryerson Ltd. Theory of Union Behaviour Unions attempt to maximize objectives given economic constraints Ability to characterize preferences of unions is difficult Chapter 15- © 2002 McGraw-Hill Ryerson Ltd. Union Objectives Factors influencing preferences information available union’s political decision-making process degree of homogeneity Chapter 15- © 2002 McGraw-Hill Ryerson Ltd. Union Objectives Utility is a positive function of wage rate and employment Indifference curve is downward sloping higher wage is needed to compensate for lower employment Curves have a convex shape diminishing marginal rate of substitution . | Chapter Fifteen Wage and Employment Determination Under Collective Bargaining Created by: Erica Morrill, Fanshawe College Chapter 15- © 2002 McGraw-Hill Ryerson Ltd. Chapter Focus Union behaviour Interaction between firms and unions Inefficient production decisions Inefficient union practices Bargaining power Chapter 15- © 2002 McGraw-Hill Ryerson Ltd. Theory of Union Behaviour Unions attempt to maximize objectives given economic constraints Ability to characterize preferences of unions is difficult Chapter 15- © 2002 McGraw-Hill Ryerson Ltd. Union Objectives Factors influencing preferences information available union’s political decision-making process degree of homogeneity Chapter 15- © 2002 McGraw-Hill Ryerson Ltd. Union Objectives Utility is a positive function of wage rate and employment Indifference curve is downward sloping higher wage is needed to compensate for lower employment Curves have a convex shape diminishing marginal rate of substitution Chapter 15- © 2002 McGraw-Hill Ryerson Ltd. DL Figure Union Objectives and Constraints Real Wage Rate W P Wa P Employment E a2 a1 U0 a3 U2 a0 U1 Chapter 15- © 2002 McGraw-Hill Ryerson Ltd. Special Cases of Objective Functions Maximize the Wage rate indifference curves are horizontal straight lines Maximize Employment indifference curves are vertical straight lines Maximize the (real) wage bill curve out from the origin-disregards alternative wage rate Maximize economic rent curve out from the intersection of alternative wage Chapter 15- © 2002 McGraw-Hill Ryerson Ltd. Additional Considerations Deriving union objectives is simplest when: preferences are homogeneous leaders are constrained by democratic decision-making processes union membership is exogenously determined Chapter 15- © 2002 McGraw-Hill Ryerson Ltd. Union Constraints (Wage Only) Unions negotiate wages taking into account the consequences The firm decides the employment level maximizing profits according to LD .
