Cyclicality of Wages and Union Power

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Abstract

This paper examines how trade unions shape the volatility of wages over the business cycle. I present a dynamic stochastic model of the labor market that integrates two main features: search frictions and trade unions. Because of search frictions, each job match yields an economic surplus that is shared by the bargained wage. Therefore, I can decompose the volatility of wages into two components: the volatility of the match surplus and the volatility of the worker share of the surplus. Starting from the unions' objective function, I demonstrate that, under collective wage bargaining, the worker share is endogenous and countercyclical. Consequently, when the economy is hit by a shock, the dynamics of the worker share partially counteract the dynamics of the match surplus and this mechanism delivers endogenous wage rigidity. The model thus sheds new insights into two business cycle features: the union wage premium uctuates countercyclically, and employment is more cyclically sensitive but less persistent when wages are collectively bargained.
Original languageEnglish
Place of PublicationFrederiksberg
PublisherCopenhagen Business School, CBS
Number of pages42
Publication statusPublished - Mar 2016

Keywords

  • Search and matching
  • Trade unions
  • Cycles

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