Bargaining

This book tackles the difficult subject of wage determination in the labor markets of highly unionized and concentrated industries where the standard models of competition, monopoly, and monopolistic competition do not apply. It attempts to bridge the gap between untested, abstract bargaining models and empirical studies that relate wages to "bargaining variables" without the benefit of formal theory. To do this, the study derives a wage equation from a bargaining model and then tests this equation on data for manufacturing industries in the United States, drawing conclusions that have important implications for income distribution and for the analysis of union-nonunion wage differentials.The study presents a survey of bargaining theories, selects one that is most applicable-Nash's theory of bargaining-and from it constructs a model of the firm under bilateral monopoly (the situation in which one employer faces one union and both are price setters rather than price takers). Assumptions are made concerning the product demand curve, production function, capital supply, supply of union members, and the utility functions of the employer and the union. These assumptions plus two hypotheses from Nash's theory determine the wage rate, employment, capital stock, output, price and profits under bilateral monopoly. The comparative statics of this model are examined.The bargaining wage equation derived from the Nash bilateral monopoly model is then tested on data for several manufacturing industries. Variable construction is discussed, and results of estimation and tests are reported. For example, this wage equation can be interpreted as a Phillips curve to which "bargaining variables" have been added. When estimates of the wage equation were compared to estimates of a simple Phillips curve without these bargaining variables, the equation explained the quarterly movement of average hourly earnings in the test industries better than the simple Phillips curve, i.e., bargaining variables that were carefully derived from a formal theory of bargaining significantly reduced unexplained variance. Finally, the book provides a much-needed theoretical basis for examining the influence of product market forces on wages and for analyzing union-nonunion relative wages.