Cyclicality of Wages and Union Power

This paper proposes a dynamic model of the labor market which integrates two main features: matching frictions and trade unions. To examine how trade unions shape the volatility of wages over the business cycle, I decompose the volatility of wages into two components: the volatility of the match surplus and, what constitutes the novelty of the paper, the volatility of the effective bargaining power. Formally, I define the effective
bargaining power of the unions as the share of the total surplus allocated to the workers. Starting from the unions’ objective function, I prove that their effective bargaining power is endogenous and countercyclical. Intuitively, because trade unions internalize the impact of a wage increase on the probability for unemployed workers to find a job, they face a trade-off between the wage rate and the employment rate. Therefore, the unions’ preferences (wage-oriented or employment-oriented) fluctuate along the cycle and so does their effective bargaining power. As a result, when the economy is hit by a productivity shock, the dynamics of the unions’ effective bargaining power partially counteracts the dynamics of the total surplus and this mechanism delivers wage rigidity. Relatedly, employment in the union sector reacts more strongly than in the non unionized sector,
but its pattern features less persistence.