Lecture 5 (2) - ECOS3008 LABOUR ECONOMICS Week 5: 29 March...

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1 ECOS3008 LABOUR ECONOMICS Week 5: 29 March
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2 Efficient contracts Central proposition: When bargaining is collective (rather than individual), negotiations should be not only about wage and work conditions, but also the level of employment .
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3 Efficient contracts (cont’d) Central proposition: When bargaining is collective (rather than individual), the bargaining contract should determine not only wage and work conditions, but also the level of employment . Iso-profit curves (IP) L IPs IP 3 has higher level of profits than IP 2 3 2 1 L W
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4 Efficient contracts (con’d) 2 IP1 3 Efficient contracts create ‘gains from trade’; these aren’t fully exploited in monopoly model: L 1 monopoly power model predicts W 1 is the agreed wage, and so L 1 follows W 1 A contract that binds the wage alone can result only in W 1 ,L 1 U1
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5 Why to be efficient the contract must A contract that binds the wage and employment level will result in lower W and higher L IP2 W 1 L 1 IP1 U1 U2
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6 Gains from Trade: Is area bounded by U1, U2, IP1, IP2. WHY? IP2 IP1 U1 U2
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7 Internal markets: Doeringer and Piore Economic roots O-T-J training job stability job stability internal pricing internal pricing unions Conclusion unions are not just political organisations; they also fulfil a vital economic and social role.
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8 Internal markets II: Williamson Role of union - purely economic Root cause: idiosyncratic exchange Key proposition: The employment contract is about the terms of an idiosyncratic exchange; therefore, wages and work conditions must be determined within the firm; Unions facilitate this task.
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9 Idiosyncracy due to what? Equipment Production processes Informal team work Communication
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10 Impact of idiosyncracy Where idiosyncracy exists there is a monopoly on knowledge. This gives rise to opportunistic behaviour in individual contracting Consequently, individual contracting is inefficient; internal markets are needed.
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11 The exit/voice approach The exit/voice distinction Public goods aspects of workplace ‘Two faces’ of unionism: Unions impact on productivity & gains from trade Unions seek monopoly wage
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12 Public goods Definition Conditions with public goods features Health and safety Speed of production line Lighting O-J-T (on job training) Flexitime Individual bargaining inflicts externalities on other workers
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13 Key proposition When public goods are involved individual bargaining is inefficient always affects a third party collective bargaining (unions) needed When exit costs are present individual bargaining fails to protect workers unions are essential when workers must rely on voice
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Impact of union on management Replaces old style paternalism with active innovative management
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Lecture 5 (2) - ECOS3008 LABOUR ECONOMICS Week 5: 29 March...

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