abstract
A labor market with search and matching frictions, where wage setting is controlled by a monopoly union that follows a norm of wage solidarity, is found vulnerable to substantial distortions associated with holdup. With full commitment to future wages, the union achieves efficient hiring in the long run, but hikes up wages in the short run to appropriate rents from firms. Without commitment, in a Markov-perfect equilibrium, hiring is too low both in the short and the long run. The quantitative impact is demonstrated in an extended model with partial union coverage and multiperiod union contracting.
5. Conclusions
514 A holdup problem emerges when an egalitarian union sets wages in a frictional labor market. 515 After demonstrating the issue in a theoretical setting, this paper studies the severity of the holdup 516 problem quantitatively in an extended model with partial union coverage and multiperiod union 517 contracting. It is shown to raise wages and unemployment significantly above their efficient lev- 518 els. The relationship between union coverage and unemployment is hump-shaped in the model, 519 with intermediate levels of coverage featuring higher unemployment than either very low or very 520 high coverage, and the bargaining power of nonunion workers playing a key role in determining 521 which of the two extremes is closer to efficient allocations. Multi-period union contracts generate 522 significant stickiness in the response of wages to shocks. Finally, the theory implies a rationale for 523 a tenure premium in union wages, as a means of avoiding the distortions associated with holdup. 524 The analysis is conducted in a stylized setting, to isolate key forces at play, but many exten- 525 sions would seem natural, such as incorporating market power/decreasing returns, physical capital, 526 worker heterogeneity, an insider-outsider wedge, as well as thinking more about the decisions of 527 workers to join versus leave the union in a dynamic setting.
