Professional Documents
Culture Documents
Spring 2016
Lars Calmfors
Topics
Weakly efficient bargaining
Strongly efficient bargaining
Wage dispersion
Co-ordination of wage bargaining
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Efficient contracts
Bargaining over the wage only and letting employers determine
employment (right to manage) is not efficient.
An efficient solution can be found by bargaining over both the
wage and employment.
Max [ R ( L ) wL ] [ ( w) ( w ) ] L
1
w, L
0 L N and w w
s.t.
Interior solution
(1 )
R '( L ) w
R ( L ) wL
(1 )
= 0
(I)
L
R ( L ) wL
'( w)
( w) ( w )
= 0
(II)
w R '( L ) =
( w) ( w )
'( w)
(III)
L [ ( w) ( w ) ]
s.t.
dw
dL
R "( L )
"( w) [ w R '( L ) ]
dw
dL
L ( w) + ( N L ) (b + w )
Firm profit
= R ( L ) wL ( N L )b
Max L ( w) + ( N L ) (b + w )
w, b
s.t. = 0
Max L ( w) + ( N L ) (b + w ) + [ R ( L ) wL ( N L )b 0 ]
w, b
FOC
L '( w) L = 0
( N L ) '(b + w ) ( N L ) = 0
'( w) =
'(b + w ) =
Hence:
'( w) = '(b + w )
w =b + w
Pareto efficiency requires a wage for the employed that is equal to
the income as unemployed.
The firm pays a benefit b to all unemployed.
It pays a wage
w + b to the employed.
Employment does not matter to the union, since members are insured
against unemployment.
The bargaining problem
Max
[ R ( L*) wL * bN ] [ ( w + b ) ( w ) ]
1
FOC:
( w + b) ( w )
'( w + b )
with
[ R ( L*) wL * bN ]
w = w +b
R '( L*) = w
Diagrammatical illustration
Indifference curves:
= ( w)
1 dw = 0
1 dw
= 0
dL
dw
= 0
dL
The indifference curves are horizontal lines.
Isoprofit curve
= R ( L ) wL bN = R ( L ) wL N ( w w )
d = 0 = R '( L ) dL wdL Ndw
dw
dL
R '( L ) w
N
= Li ( wi ) + ( N i Li ) ( wi + bi )
Li N i
i=1
10
Bargaining problem
Max R ( L , L ) ( w L
b ,b , L , L
i =1
0 Li N i
s.t.
b N ) N { ( w
1
i =1
b ) ( w )}
i = 1, 2
FOCs
(11)
R (L1 , L2 )
L1
= wi
N [ ( w ) + b ) ( w ) ]
R ( L , L ) ( w L + b N )
(12) '(w i + bi ) =
i=1
i =1
Equation (12): RHS is independent of i. Hence the same wage for the
two types of labour.
11
N1
N1 + N 2
( w1 ) +
N2
N1 + N 2
( w2 )
N1
+ N2
1
w1 +
N2
N1 + N 2
N1
N1 + N 2
w1 +
N2
N1 + N 2
12
Max [ R ( L ) wL ]
1 L
[ ( w) ( w ) ] L L L
s.t. 0 L N
Max
[ R ( L ) wL ] [ ( w) ( w ) ] L
1
L ( L , w , w) and w w
s.t. L =
Different cases
L = 0 and > 0 gives the right-to-manage model
L = gives (weakly) efficient bargain model
Otherwise solution on neither labour-demand schedule nor
contract curve
13
Motivations
Efficient bargaining is complex
Wage bargaining precedes employment bargaining
Wage bargaining is often at more centralised level
Strongly efficient bargaining is improbable because of
moral hazard problems: unemployed being fully insured
will not search effectively for jobs
- argument for partial insurance
- individual firm (sector) offering full insurance would be
swamped by labour inflow
One does not find many examples of contracts with
unemployment benefits paid by firms
Unclear empirical results on right-to-manage model and
(weakly efficient) bargaining
14
wc + (1 ) b,
Pc = CPI
b = Real unemployment benefit
15
16
17
18
The degree of co-ordination and the real wage in a closed economy (the
Calmfors-Driffill curve)
19
20
An extended model
21
22
23
Labour demand
LI = L and LE = 0 if w wO
LI = LO and LE = L LO if w wO
If w wO we have LI = L < LO , so some insiders are fired.
24
Wage bargaining
A = Min (1, L / LO )
[ ( w) ] {A [ ( w) ( w ) ]}
1
( w1 ) ( w )
w '(w1 )
w + (1 ) w
L
(10)
Solution with A = 1
Set w = 0 in (10); employment of insiders cannot increase
L
( w2 ) ( w )
w2 '(w2 )
(1 ) w
25
Different solutions
B1
B2
>
w
w
Larger gain from wage increase if only outsiders lose their jobs
than if also insiders do.
Second-order conditions for a maximum
2 B1
(B1 / w)
=
< 0
w
w2
2 B2
(B2 / w)
=
< 0
2
w
w
26
(1)
B1
>0
w
(2)
(3)
B2
>0
w
B1
>0
w
w > w0 and L L0
w = w0 and L = L0
B2
<0
w
B1
>0
w
w < w0
B2
<0
w
27
28
Conclusion
A fall in the number of insiders results in an unchanged wage
or in an increase in the wage
Explanation of the persistence of unemployment
No incentive to reduce the wage as the union does not care
about the unemployed
Empirical research has had problems finding that a reduction
in lagged employment has a positive effect on the wage.