Unions in a Frictional Labor Market

Abstract:     
We analyze a labor market with search and matching frictions where wage setting is controlled by a monopoly union. We take a benevolent view of the union, assuming it to care equally about employed and unemployed workers, to treat identical workers in identical jobs the same, as well as to be fully rational, taking job creation into account when making its wage demands. Under these assumptions, if the union is able to fully commit to future wages, it achieves an efficient level of long-run unemployment. In the short run, however, the union raises current wages above the efficient level, in order to appropriate surpluses from firms with existing matches. The union wage policy is thus time-inconsistent. Without commitment, and in a Markov-perfect equilibrium, not only is unemployment well above its efficient level, but the union wage also exhibits endogenous real stickiness, which leads to increased volatility in the labor market. We consider extensions to partial unionization and collective bargaining between the union and an employers’ association.

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