Unions in a Frictional Labor Market

A previous version of this working paper was originally published in March 2016.

The authors study how this hold-up problem manifests itself in a dynamic infinite horizon model with fully rational agents. They find that wage solidarity, seemingly an important norm governing union operations, leaves the unionized labor market vulnerable to potentially substantial distortions because of hold-up. Introducing a tenure premium in wages may allow the union to avoid the problem entirely, however, potentially allowing efficient hiring. Under an egalitarian wage policy, the degree of commitment to future wages is important for outcomes: 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, and in a Markov perfect equilibrium, hiring is well below its efficient level both in the short and the long run. The authors demonstrate the quantitative impact of the union in an extended model with partial union coverage and multiperiod union contracting.