Transcript DANISH NEIGHBOURS AS NEGATIVES

Employment and Unions
Andrew E. Clark (Paris School of Economics - CNRS)
http://www.parisschoolofeconomics.com/clark-andrew/
APE/ETE Masters Course
The study of institutions, how we came to have them,
and what effect they have on economic outcomes is a
growing topic in Economics. And arguably is a move
towards a more unified social science (maybe).
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Common or Civil Law
Central Bank Independence
Divorce Law
Minimum Wages/EPL
Trades Unions
I consider the last of these here, and especially wonder
about the effect on employment.
Online OECD Employment database
http://www.oecd.org/document/34/0,3343,en_2649_33927_40917154_1_1_1_1,00.html#union
Iceland
Finland
Denmark
Sweden
Norway
Belgium
Luxembourg
Ireland
Italy
Canada
Austria
United Kingdom
Slovenia
Greece
New Zealand
Portugal
Japan
Germany
Netherlands
Australia
Switzerland
OECD (a)
Czech Republic
Slovak Republic
Hungary
Spain
Poland
Chile
Mexico
United States
Korea
Estonia
France
Turkey
% 0
79.4
70.0
68.8
67.7
54.6
52.0
37.3
35.5
35.1
28.8
28.1
25.8
25.6
24.0
20.8
19.3
18.6
18.5
18.2
18.0
17.8
17.5
17.3
17.2
16.8
15.9
15.0
15.0
13.2
11.3
9.7
8.1
7.6
5.9
10
20
30
40
50
60
70
80
90
35
30
25
20
15
10
10
20
05
20
00
20
95
19
90
19
85
19
80
19
75
19
70
19
65
19
19
60
5
Chile
Estonia
France
Korea
Mexico
Spain
Turkey
United States
OECD (a)
60
50
40
30
20
10
20
05
20
00
20
95
19
90
19
85
19
80
19
75
19
70
19
65
19
19
60
10
Czech Republic
Germany
Greece
Hungary
Japan
Netherlands
Poland
Portugal
Switzerland
100
90
80
70
60
50
40
10
20
05
20
00
20
95
19
90
19
85
19
80
19
75
19
70
19
65
19
19
60
30
Belgium
Denmark
Finland
Iceland
Luxembourg
Norway
Sweden
Let’s meet an old friend: The labour demand
curve.
Wages
b
LD
Lb
L
This shows how employment is determined in a competitive market.
The labour demand curve is defined by the choice of employment
to maximise profit at a given wage.
Wages
1 > 0
w*
0
1
LD
L*
Derive this formally.
 = pF(L) – wL
Along an iso-profit curve, d=0. Totally differentiate:
d = pF’(L)dL – wdL –Ldw = 0
So dw/dL = (pF’(L)-w)/L
dw/dL = 0 where pF’(L) =w, which is the equation of
the labour demand curve.
A key difference between workers (labour) and other
inputs (land, materials, machinery): workers can
express themselves, and bargain. In particular, they
cannot be forced to work.
They can form unions.
What are the implications of trades unions for the level
of employment? Both at the firm (micro) and the
economy (macro) level.
Macro is not  micro: representative agents may lead us
astray…
Empirical regularities regarding unions.
1) Productivity:
a) Higher union wages might “shock” the firm into
being more productive
I used to think of this is being a “bof” argument.
But I have now changed my mind. This is very simply
set out in Mayneris et al. (2015)
Higher union wages may yield firrm-level efficiency
gains.
Assume that firms have to choose between two
production processes:
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A high-tech process with low constant marginal
labor requirements but a high fixed adoption cost
A low-tech process with high marginal labor
requirements but no adoption cost.
Higher wages widen the marginal-cost gap between the
high- and low-tech technologies.
Keeping quantities constant, the opportunity cost of
adopting the high-tech process falls with wages.
Firms which may have previously preferred the low-tech
process may switch to paying the fixed cost required
for the high-tech process.
Low wages here act as a disincentive for the adoption of
more efficient production techniques.
b) Improvements in worker morale and cooperation:
union provides a “collective voice” (rather than
exit).
Implication of b): labour turnover should be lower
amongst union members, ceteris paribus.
c) Protect membership and block innovation (Luddites).
Which reduces worker effort (and so productivity)
Empirical evidence from the US has produced
only mixed evidence: some positive, some
negative.
This is true in both levels and growth
UK evidence suggests a lower productivity level;
results in terms of productivity growth are
again mixed.
Bear in mind that productivity is famously
difficult to measure, and is most often
calculated as a residual.
Measure output as Q = f(K, L, M)
Log-linearised as
Q = αlnK + βlnL + γlnM
Productivity measured as Q – Q-hat
Very noisy
2) Capital:
The other factor of production
a) Unions tend to be associated with lower levels of physical
investment and R&D.
b) But unions are associated with greater levels of worker training
(which is unsurprising if they quit less: they stay longer for the
firm to recoup its investment).
3) Working Conditions:
A positive effect (unsurprising)
Don’t forget causality. Unions may improve conditions, but poor
work conditions predict unionisation too.
Our conditional correlation coefficient here measures the net effect of
positive (direct) and negative (selection) phenomena
So that it represents a lower bound of the causal effect.
4) Wages:
Unions are associated with higher worker wages; they are also
associated with lower wage inequality (the wage effects of
unions are felt most strongly for the low-paid.
There is a direct union effect via their bargaining wages for
covered employees.
There are also indirect effects:
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Longer tenure → firm-specific human capital investments
Threat of unionization raises wages in the non-union sector.
Job losses in union sector, resulting in excess labor supply to
non-union sector.
These will affect the wages of both members and non-members
It’s actually not that obvious to come to a
conclusion about the union wage effect.
The union wage differential is given by:
di=(wiU-wiN)/wiN
In practice, we don’t observe the same individual
“i” as both a union member and a non-union
member. We thus compare across
individuals:
d=(wU-wN)/wN
Problem is that union members (who give us the
wU) might have very different observed and
unobserved characteristics to non-union
members (who supply the wN figure).
i.e. There is omitted variable bias.
Typically estimate
Ln wage = γU + βX + ε
Ln wage = γU + βX + ε
We then then have (total differentiation)
dw/w = γdU
So that the elasticity of wages w.r.t. unions is
dw/dU x U/w = (γw/w) x 1 = γ
This is a partial equilibrium estimation. In
practice the wage of non-union members will
be determined by some regression as well.
And the probability of union coverage will be
some function of the difference between
union and non-union wages.
Difficult to do this well: need an exogenous
change in union membership (that does not
directly affect wages).
Estimates of the mark-up in the UK are around
7-12%.
The wage premium in the UK and the US has
been pretty stable over time.
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Unions have persisted in high mark-up
sectors
Weaker unions reduce non-union wages too
Rising competition will not affect industries
with market power or the State sector.
The union wage effect is higher for manual and
low-skilled workers (wage compression, as
noted above).
The union wage premium has been suggested as
one reason why union density has been
falling (wage effect larger than the
productivity effect) – but this doesn’t explain
why the mark-up hasn’t faded away above.
Another is the change in industrial composition.
A third is “institutional”: change in the legal
environment, worker preferences,
government regulation of the labour market.
5) Job Satisfaction:
Typically found to be negative.
• Careful of causality (desire for union representation
is negatively correlated with satisfaction)
• Are union jobs really worse, or do unions just allow
people to moan more (give them a voice)? Test this
via an objective correlate of satisfaction: quits.
Model:
quit = q(X, satisfaction, union, union*satisfaction).
What happens when workers unionise?
Union utility function:
U =Lu(w) + (M-L)u(b)
M is union membership, L is employment of
union members. Totally differentiate for the
indifference curve:
dLu(w) + Lu’(w)dw – u(b)dL = 0
So dw/dL= -[u(w)-u(b)]/Lu’(w)
Utility increases North-Westwards. Negativelysloped as long as u(w) > u(b): indifference
curves become horizontal at w=b.
I0
I1
I2
Wages
b
L
Models of Union Behaviour
1) MONOPOLY UNION
The union makes all of the decisions here, by choosing
both the level of wages and the level of
employment, subject only to the constraint that the
final point be on the labour demand curve.
I0
I1
I2
Wages
wMU
LD
LMU
L
2) RIGHT TO MANAGE
More realistic. Employment is chosen by the firm, wages
are bargained over.
Nash bargaining solution
Max B = [Lu(w)+(M-L)u(b)][pF(L)-wL] 1-
w
s.t. the labour demand curve (pF’(L)-wL)
The parameter  reflects the union’s relative bargaining
power.
If =0 then the firm has all the bargaining power;
If =1 then the union has all the bargaining power;
RTM solution is
somewhere along the
LD curve, between
wMU and b.
I1
Wages
=1: Monopoly Union
wMU
b
=0: Competitive (no union)
LD
L
Both the Monopoly Union and the RTM models have the
implication that higher wages are associated with lower
employment: because we are moving up and down the
labour demand curve.
All of the MU/RTM solutions are on the labour demand
curve. All of these solutions are (in general…) inefficient.
We therefore turn to the….
3) EFFICIENT BARGAIN
Here both wages and employment are negotiated between
the firm and the union. We have the same Nash
maximand as above, but now maximised over both w
and L.
The EB reflects the general principle that for efficiency,
we should always bargain over all of the elements upon
which our utility depends.
Only let others decide when we do not care (when our
utility does not depend on them).
I1
I2
An EB point is not
Wages
wMU
The MU point
is inefficient
1
LD
L
Efficient points are given by the tangent between the IC and the isoprofit curve. At any other point, we can make one of the firm and the
union better off without making the other one worse off.
Tracing these out produces an upward-sloping curve in (w, L) space.
Note that when indifference curves are flat, the tangent to the iso-profit
curve will be on the labour demand curve. This is true at w=b.
CC
I1
CC = the Contract
Curve
Wages
wMU
b
1
LD
0
L
In the EB model, there is a positive relationship between
wages and employment. Moving up the CC curve implies
greater union bargaining power. The union takes part of the
payoff of more power in wages, part in employment.
The problem with the EB is that it doesn’t seem to describe
the real world very well. While unions do negotiate over
wages, they most often probably don’t negotiate over
employment.
Therefore in most of the bargains that we observe, higher
wages are associated with lower employment. As we now that
unions are associated with higher wages, surely it’s a nobrainer to say that they reduce employment?
The Macroeconomics of Trade Unions
The microeconomic analysis above was partial equilibrium. We didn’t consider
the effect of one firm’s wage and employment decisions on other firms.
In the macro analysis, we will take these effects on board. This changes the
results.
Consider an economy with trade unions. There are a number of different
dimensions along which we can describe the “degree of unionisation” of that
economy.
1) The percentage of workers who are union members (Union Density)
2) The percentage of workers who have their pay and working conditions
decided by union bargaining (Collective Bargaining Coverage)
3) How many unions there are
4) At which level do unions bargain: firm, industry, economy? (Degree of
centralisation)
5) Do different unions coordinate their bargaining activities? (Degree of
coordination)
Inspiration for this literature
The wildly different macro performances of OECD countries in
the 1970s and 1980s following the first two oil-price shocks.
Some, such as Japan, Austria and the Nordic countries, seemed to
have levels of unemployment and inflation that were
persistently lower than those in other countries.
The bad pupils: the rest of Western Europe, and North America.
Different macro performance could come from macro variables
(interest rates, exchange rates…)
…or from institutions. We here particularly think of trades unions.
The initial focus of this work was on bargaining centralisation.
This can range from the establishment-level right up to the
country level.
Branch/
Industry
Establishment
Firm
Country
OECD countries operate at wildly-different points on this scale: see
my attempt at a ranking in Table 3.3. of the Employment
Outlook chapter. Nordics to the right; N. America to the left;
much of Western Europe in the middle
There is movement between countries, and within countries over
time.
So what?
We are interested in this because of its potential impact on
economic performance.
A distinction (vastly oversimplified):
• “Eurosclerosis” school: centralised bargaining is a rigidity
which prevents labour markets from clearing
• “Corporatists” believe that centralised institutions may help us
to overcome market failure.
Both imagine a linear relationship between bargaining
centralisation and performance: this assumption was challenged
in a well-known paper by Calmfors and Driffill in Economic
Policy in 1988.
CD do think that there is a ranking in terms of centralisation and
economic performance; they just suggest that the middle is
worse than the two ends.
Initial analysis carried out in terms of the unemployment rate.
Unemployment
Centralisation
Based on two key elements: the first is externalities.
Externalities
Are others hurt by the higher wage a union bargains for its
members?
My members receive higher wages, and are thus happy.
What about others?
Calmfors (1993) identifies six potential routes via which higher
wages for a union might reduce the utility of those not covered
by the bargain.
1) Consumption prices (lower real wages)
2) Input prices
3) Fiscal effect (have to pay for others’ unemployment)
4) Unemployment (less chance of getting another job if you are
yourself unemployed).
5) Relative utility: u=u(y/y*)
6) Efficiency wages. If e=e(y/y*), then effort by uncovered
workers will fall.
Suppose that individuals are not altruistic. To what extent will
these externalities be taken into account?
Decentralised bargaining will take none of them into account:
those who profit from higher wages represent only a small
percentage of those who are hurt by them.
As we move from left to right on the centralisation scale,
negations cover a greater percentage of people: we take more
notice of the costs of higher wages relative to their benefits.
At the logical extreme, if we bargain for everyone in the country,
then those who profit and those who are hurt are the same
people: externalities are internalised.
Internalising externalities leads to wage moderation. The
relationship between centralisation and wages is negative,
therefore so is that between centralisation and unemployment.
Unemployment, wages
Centralisation
The second key element is the price elasticity of demand, which
determines the derived elasticity of labour demand.
By what percentage will employment fall if wages rise by 10%?
Monopolists pass all of the wage increase onto prices, if demand is
totally inelastic, so there is no employment effect.
As the number of rival products or substitutes rises, the price
elasticity of demand rises, and so does the elasticity of labour
demand.
Under perfect competition, only a slight increase in wages and thus
price leads the firm to lose all of its market.
Price elasticity imposes market discipline: the lower is the level of
centralisation, the more market substitutes there are, the greater
is the elasticity. Decentralisation brings wage moderation
Unemployment, wages
Centralisation
Put these two elements (internalisation and elasticity) together and
you’ve got what?
CD argue that this produces a hump-shaped relationship between
unemployment and centralisation.
I reckon they might be right; but I also think it could produce all
kinds of other shapes too.
Let’s take it to the data to decide.
CD used four performance indicators.
• Unemployment rate
• Employment rate
• Okun Index (unemployment plus inflation rates)
• API (unemployment plus current a/c deficit as % of GDP)
17 OECD countries, 1974-1985.
Classified according to centralisation of the collective bargaining
system; split up into three groups.
First two columns in each panel of Table 3.2 show CD’s results.
Note jacknife-style worries about the classification of Switzerland
Unemployment rate
Centralised best; unemployment is hump-shaped.
Less obvious when updated.
Employment rate
U-shaped in 1974-’85. Less obvious when updated.
Okun Index
Not U-shaped.
API
Sort of hump-shaped, perhaps.
Drawbacks of CD
No statistical testing. Some of these means (many?) are not
significantly different from each other.
Doesn’t take into account density, CB coverage or coordination.
Countries are assumed to have the same classification over a 20year period, even though there is substantial movement.
Update CD to mid-90’s. Add Spain and Portugal. And run
regressions.
Classifications of countries in Table 3.3.
A) TU Density.
France is strange. TU density has been drifting downwards.
OECD Trade Union Density: 1980 1990
46%
40%
1994
40%
B) CB coverage is usually greater than membership. See Figure
3.1.
OECD Collective Bargaining Coverage:
1980
1990
1994
72%
70%
68%
C) Centralisation. Higher in Nordic countries; lower in Canada,
Japan, NZ and the US.
A decentralisation tendency in the UK, Australia, Denmark and NZ.
A centralisation tendency in Italy and Portugal.
D) Centralisation is no use if centralised agreements are
renegotiated at more local levels. Take union coordination into
account. This is higher in Austria, Germany and Japan; lower in
Canada, the UK, NZ and the US.
A tendency towards less coordination.
One of the big issues in this literature has been the wild
proliferation of indices.
There are as many indices of country bargaining regimes as there
are authors, I reckon.
Happily, they do seem to be pretty well correlated (see Table 3.4).
Simple correlations
I have five macro performance indicators (five-year averages)
• Unemployment rate
• Employment rate
• Inflation
• Real wage growth
• Wage inequality
Table 3.5 shows Spearman rank correlation coefficients. Thus
looking for a linear relationship. Not much comes out of that
(although unions associated with less wage inequality).
To identify non-linearities, recode rank. Instead of
1, 2, ….., 18, 19
use an ascending-descending rank (middle worse or better than
ends?):
1, 2, …, 8, 9, 10, 9, 8, ….2, 1.
Any positive correlation implies middle-ranked countries have
more of whatever it is we’re looking at than the ends do.
Only result: a hump-shape with inflation, but even this goes away
by 1994.
Pooled Regressions.
Make up dummies for centralised/coordinated and intermediate.
Countries can change classification over time.
OLS regressions in Table 3.6. 57 observations.
TU membership:
+ E, - inequality
CB coverage:
+ unemployment, inflation, -E
Centralised:
- unemployment, inflation, inequality
Intermediate:
- inflation, inequality.
What a mixed picture. One thing we can say is that there is no
evidence of a multivariate hump-shape.
Strong inequality result.
Is centralised best after all?
Fixed-Effect Regressions.
Look at changes within one country over time.
See Figure 3.2. What happened to countries that
decentralised/became less coordinated?
Unemployment rose, employment fell, and inequality rose.
Conclusion:
• Micro union theory suggests that higher wages increase
unemployment.
• Macro theory suggests that there is a hump-shape with respect
to centralisation.
• Difficult to find clear evidence.
• Unions certainly raise wages. But they might raise productivity
too (human capital, discourage quits, voice leading to higher
effort). So we’re still on the labour demand curve, but the
whole thing has shifted to the right.
• We have considered only price-taking firms. When firms have
market power, then the effect of wages on employment is not
so clear (see Alan Manning’s Monopsony work).
• All the empirical literature is probably flawed anyway:
unionism is not exogenous. Find a good instrument
(recognition ballots?)
Am I out of date?
• Is anyone really interested in unions anymore anyway?
• To put it another way, will North American journal editors
publish me if I work on this?
70
60
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40
30
20
Your Journal Editor
Lives Here…
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Union density is certainly in free fall in the US.
• 2014 BLS figures. 14.6M union members in
the US (11.1%); 15.9M covered workers
(12.5%).
• Private union density is now 6.6% (public
sector density is 36%).
• But that’s not so true in Europe.
• One phenomenon which is on the rise in the
US is licensed occupations.
• Occupations are becoming increasingly
restricted.
• Have to meet certain standards to practice the
profession
• Or have to be certified to use the job title
(others can carry out same duties, but not use
the job title).
• As such, there are restrictions on entry and the
supply of labour
• Which increases the price of services and
wages.
• Applies to Dentists and Doctors (thank
goodness)... and Lawyers.
• But also to hairdressers and florists
• Licensed Occupations now account for over
20% of jobs. Great deal of inter-State variation:
from 5% in Kansas to 30+% in California.
• There is huge State variation in union density
in the US as well, from New York (25%) to
North Carolina (2%) [figures for Kansas and
California are 7.4% and 16%]
• Argument for licensing is that it increases the
quality of service.
• Yet Kleiner finds no cross-State difference in
customer complaints in occupations that are
licensed in Wisconsin, but not in Minnesota.
• Equally insurance premia for malpractice by
medical practitioners are the same in licensed
and unlicensed States.
• Licensing is associated with restrictions on
labour supply, however (reduced the growth
rate of employment by about 20%).
• Consequently led to higher wages (10-17%):
sound familiar?
Postcript
Two questions about institutions
i) What effect do institutions have on
outcomes?
ii) Why do we have institutions in the first
place?
There are likely factors, Z, which help bring
about institutions.
We have an empirical problem if the same Z
have a direct effect on outcomes too.