Analysis of Approaches to Bargaining Models

Analysis of Approaches to Bargaining ModelsAbstractThis paper discusses the various types of approaches to bargaining models, namely impassivity curves and iso-profit curves, monopoly married couple behavior and high-octane contracts. Then we go on to study the concept of efficiency honorarium in a nonionized as easily as a non- heart and soulised environment and with the help of existing economic theories we develop a model and incorporate the alternative hire rate. On completion of this paper, we impart be able to understand the influence of take train, alternative earnings rate and other factors on the manipulation level, which would be highly important to twain the steadfasts as well as the advertiseers side while framing policies.IntroductionBefore starting with the paper, we need to know what efficiency wages are. It is the wage that is stack by the tightens or the employers which is high than the market clearing wage. There are certain implications behind t his action. Doing this, it would encourage workers loyalty towards the employer the firms would be able to attract higher number of talents and thereby improving the appli ratts pool, raise the morale of the workers and as a result the overall efficiency of the firms increases. In various efficiency wage models, dig up productivity has a positive relationship with the wage rate. Also worth mentioning, is that the efficiency wage model is an extension from the Shapiro-Stiglitz model of efficiency wage. In this paper, we combining twain the microeconomics concept of labour union and the model of Shapiro-Stiglitz to derive the various propositions.Moving ahead, we discuss the basic two models of wage rate determination for the unionised and non-unionised sector of the economy. The first would be the monopoly model, as prescribed by Oswald in 1985, assumes that the labour union chastens the wage and the employer chooses the profit maximizing conflict level. The second mooring sim ilarly stated by Oswald in 1985, notes that twain the employers side as well as the workers side gage make from the monopoly outcome by jointly bargaining over the wages and employment level.Literature ReviewOswald, A. (1985) The Economic Theory of commerce Unions An Introductory Survey S cannisterdinavian Journal of Economics, the great unwashed 87.Oswald assumed that the union sets the wage and the employer chooses the profit maximising employment level. He also stated that the efficient bargaining model notes that both sides can improve on the monopoly outcome by jointly bargaining over wages and employment.Brown, J. and Ashenfelter, O (1986, June) Testing the cleverness of Employment Contracts Journal of political Economy, volume 94.They apply the significance of a measure of alternative wages in an employment regression as evidence for the efficient bargaining model.Stiglitz, J. (1987, March) The Causes and Consequences of the habituation of quality on price Journal of Economic Literature, volume 25.In relation to the efficiency wages hypothesis, Stiglitz stated that, one motivation for this literature is to beg off involuntary unemployment If the efficiency wage is framework is valid, then firms may not lower wages plain in the face of excess supplies of labour.Krueger, A. and Summers, L. (1988, March) Efficiency wages and the inter-industry wage structure Econometrica, volume 56Another additional motivation of this literature is the that the empirical observation that inter-firm or inter-industry wage assortedials remain even after(prenominal) most possible economic determinants of these differentials have been controlled.Katz, L. and Summers, L. (1989) Industry rents Evidence and Implications Brookings text file on Economic Activity, Microeconomics.The wage differentials tend to lower quits and increases the length of queues of mull seekers attempting to gain entry. They explained the relationship between the existences of rents associate d with efficiency wages.Research QuestionWhat is the effect of general wage level and alternative wage rate on the employment level, when efficiency wages are paid both in a non-union as well as union setting?MethodologyThe theory of income dispersal is the study of the determination of the shares of the factors of production in the total output produced in the economy over a given period of time. For simplicity, we assume two factors of production, labour and capital, their shares are defined as followsShare of Labour = (w*L)/ X and share of capital = (r*K)/XWhere w= wage rate, r= rental of capital, L= quantity of labour employed, K=quantity of capital employed and X= cheer of output produced in economy.With this backdrop, we proceed on to the model where we consider firms and labours perspective, in both unionised and non-unionised labour setting. Initially, labour force is unionised. As a union, three of the most comm scarcely pursued goals are maximization of employment, maximi zation of total wage bill and maximization of total gains to the union as a whole. The general conclusions derived from this microeconomic thought are firstly, if the firm buyers have no monopsonistic power, labour unions can possibly attain an increase in the wage rate at the cost of a lower level of unemployment. Secondly, if the firm buyers have monopsonistic power, the unions actions can go on one part of the monopsonistic exploitation and thirdly, if the firm buyers have monopsonistic power, trade unions can increase the total wage bill in most of the cases, by both increasing employment or the wage rate or both.Considering, the concept of efficiency wage hypothesis and incorporating the alternative wage rate as used by Shapiro and Stiglitz we combine this macroeconomic phenomenon with the microeconomic concept of labour union. Looking at the employment level, alternative wage rate, normal wage rate we can run a regression analysis on the employment level with various other v ariables and determine the significance of these and come up with propositions under different cases.Bargaining ModelsIn the context of labour unions, there are different types of bargaining that can take place between a firm and a labour union. These rules are also applicable in many other aspects other than labour unions.Indifference Curves and Iso-profit CurvesHere, we look at the unions preferences as the preference for a sensation worker. We can formulate the utility of the worker as a hunt down of consumption, C and leisure, L, i.e. U (C, L). Representing, the utility function in terms of wage rate, w and labour supplied, h, we can write it as followsU (h, w) = U (w*h, 1-h)where C = w*h and considering time constraint L= 1 h. An indifference curve in (h, w) space is defined by setting u as (constant) and we define w implicitly as a function of h, w (h). Therefore, we can write it as followsU (h, w (h)) = U (w (h)*h, 1-h) = Differentiating, the preceding(prenominal) equal ity with respect to h and therefrom obtaining the slope of the indifference curve.This implies that along the labour supply curve, where MRS = w the indifference curve will have zero slope. To the left of the labour supply curve, workers work more and so MRS w and the indifference curve is upward sloping. We can reinterpret the first order condition for conclusion labour supply as the worker puzzleing the highest indifference curve in (w, h) subject to the constraint that w equals the offered wage, leading to the tangency shown below.Looking at the firms side, its preferences are derived using the iso-cost curve. The firms profit function can be written as follows (E, w) = f (E) w*EWe set the price to unity and along an iso-profit curve, we set the profit equal to some constant , which implies an implicit relationship between w and E. Therefore, we can write it as f (E) w (E)*E = .Differentiating, the in a higher place equation implicitly, we find the slope of the iso-profit curvealong the pick out curve MPE = w, implying that iso-profit curves are flat when they go after the labour demand curve. Left of the demand curve, means MPE w hence iso-profit curve is upward sloping, and right of the labour demand curve, means MPE Monopoly union BargainingIn this model, the labour union sets the wage rate, w and the firm chooses the employment level, E. Since, the firms objective is to maximize lettuce, it will set the employment level at the point where VMPE = w. Assuming the union acts like a single individual so that h = E, its problem is thenMax U (w*E, 1- E)subject to MPE = wMaximizing with respect to E, and using the first order conditions we get, f (E) = w.The above expression implies that the indifference curve will have a negative slope while the iso-profit curve has a zero slope and to interpret the cross of the two curves it would mean inefficiency. Workers would be willing to work more at a slightly lower wage and firms would make profits hiring them. However even if unions do function this way, that does not mean they are necessarily bad workers are made better off, but these gains are smaller than the losses to firms and consumers. If the value of the redistribution to workers is considered more important than the loss to the other parties then the union may still be a good thing. However it would be better for everyone if the union and firm could find a more efficient way of bargaining.Efficient ContractsThis is another model of unions which assumes that the labour union and firm will bargain in such a way that it leads to an efficient outcome. Now, any Pareto efficient outcome will be reached between two parties by guaranteeing some level of profits to the firm, and maximizing the unions utility.Max U (w*E, 1- E)subject to f (E) w*E = On solving, we get w = (f (E) ) / E. The first order condition can be written as followsSolving algebraically we get that the iso-profit curve and the indifference curves are tangent. It cannot be solved as to which combination of (E, w) will be chosen as there are several points- the locus of all these points represent the contract curve. Some information on profit and utility functions is unavoidable to determine whether the contract curve of the efficient contracts is downward or upward sloping, or vertical (the strongly efficient case).The ModelGeneral AssumptionsAll the workers are identical.The workers choose their own level of work attack and this work effort is monitored by the firm with the help of technology.The monitoring cultivate by the firm is not the most efficient or it is not perfect.The monitoring process can be expressed in terms of work effort as follows, q (e), 0, which implies that a worker will not be dismissed for an exogenously given level of work effort.All the workers have an identical utility function given as followsU (w, e) = w e2(eqn. 1)The workers are provided with unemployment insurance or they can obtain another or alternati ve job with wage rate.Efficiency Wages in a non-union settingAnalysisNow, if the workers are able to choose their level of work effort, which is not monitored perfectly by the firm, then the firm may pay wages above the market wage rate to ensure a higher level of efficiency or effort by the worker. The question is how would alternative wages enter an employment regression in this case?We have already assumed that the firms monitoring process can be expressed as a function of, q (e), suggesting that the workers are not dismissed for an exogenously given level of work effort. The workers can reduce their likelihood of acquire dismissed, by the firm, by increasing their level of work effort. Implication behind this statement suggests that, q 0.Let n be the elasticity of q with respect to level of effort. We can therefore show that the optimal effort for the worker ise =(eqn. 2)In order to model the firm, we make another assumption of a cupulate revenue function, f = f (e*L) w*L(eq n. 3)Using the optimization technique, the firm chooses the level of w and L, subject to the workers choice of e.From the equations 2 and 3, we find out that the optimal wage rate, w is twice that of the alternative wage rate,.Expressing f as a logarithmic form as a unidimensional combination of various exogenous variables that affect the revenue and effective units of labour, the optimal amount of labour for the non-union firm isln L = + ln ln w + X + ln (w )And ln f = 0 + 1X 2 ln(e*L)(eqn. 4)X is the vector of non-labour factors affecting the borderline revenue product of labour.Interpretation of equation 4, is that the alternative wage rate, , conditional on w and X, will be negatively correlated with the actual or observed employment.Proposition On running a regression of employment on wage level and alternative wage rate, it should yield a negative coefficient for the alternative wage if efficiency wages are paid even in the absence of efficient bargaining.Efficiency Wag es in a Union settingHere, we discuss the case for efficiency wages in a unionised scenario and find the resulting demand for labour under both (a) monopoly unions and (b) efficient bargaining methods.Monopoly UnionsConsidering that the union comprises total of N number of workers, who are employed at the wage rate, 2. Using, the previous method discussed we calculate the optimal worker effort, e*, wheree* = Each worker faces the probability of getting dismissed with a probability of q (e*). We also assume that the workers getting dismissed by the firms are replaced immediately. Now, the unions objective is to choose w, so as to maximize the expected utility, V, of unionised worker. Let L be the employment level at the new union wage, w. Then for each wage, w, we have,V = q (w e2 ) + if L And V = q (w e2 ) + if L N (eqn. 5)Now, in the case for monopoly unions, as the union raises the wage levels, it generally lowers the total employment level, hence we have L , a rising w woul d lead to rising employment because of change magnitude work effort. The union balances the negative effect of wages on employment and positive effects of wages on employed members utility. Multiplying, equation 5 by N, the union chooses w to maximizeV = Lq ((w e2 ) (eqn. 6)Subject to fe = wUsing the optimization techniques, we solve for the monopoly union wage, ww = (eqn. 7)2 is the measure of the slope or the steepness of the marginal revenue product curve. Higher the elasticity, n, with respect to effort, higher will be the union wage. In this model, the marginal revenue productivity condition for the monopoly model with efficiency wages is similar to the condition for non-union firms, although in this case, the unions will raise the wages and lower the total employment. This leads to the succeeding(a) proposition.Proposition Under monopoly model and efficiency wages, if we run a regression of employment on X, w and and a union conjure up term, the coefficient on the union shift should be zero. However, in a regression that includes only the exogenous variables X and and a union shift term, the coefficient should be negative.Efficient BargainingHere, we contract on the case where labour and the management jointly set wage rate, w and employment level, L.According to Mc. Donald and Solow, 1981, to derive the set of efficient contracts, they have suggested the necessary conditions for the contract curve.Vw / VL = w / LThe subscripts represent the partial derivatives.Using equations 3 and 6, and substituting in the above contract curve relation, we get,(w fe) / (1 few) = (w ) 0 (eqn. 8)As long as the union raises the wages above the non-union wage 1- few 0 and so is w fe. Wages hand the marginal revenue product of labour (as already suggested by McDonald and Solow, 1981). Algebraically, solving the slope of contract curve is not possible and hence is indeterminate which leads to the contiguous proposition.Proposition Under efficient bargaining m ethod and efficiency wages, if we run a regression of employment on X, w and and a union shift term, it will yield a positive coefficient for the union shift term as compared to a zero coefficient under monopoly model. However, in a regression that includes only the exogenous variables X and, the sign of the union shift coefficient is ambiguous, as compared to a negative coefficient in the monopoly model.ConclusionThe results from the above classification of models suggests that traditional way of determine wage bill, i.e. labour times the wage rate, by the labour union and the employment level determination by the firm side are not the only factors that affect the decision making process of both the sides. Rather, the alternative wage rate, which is one of the factors taken up by Shapiro and Stiglitz in their efficiency wage model, is also instrumental in affecting the employment level. Another union shift term incorporated while running the regression, we find that it is also one of the determinants of employment determination. So, the ultimate conclusion that we can derive is that there are certain other factors as well in both wage and employment determination and these factors are statistically significant in different cases which again lead to various policy implications. Hence, modification of the theoretical microeconomic floor and including certain other variables will show us a greater and deeper understanding of the employment determination and thereby various other policy prescriptions that both the sides can take into account while framing one.ReferencesStiglitz, J. (1976, July) The Efficiency Wage Hypothesis, Surplus Labour and the Distribution of Income in L.D.C.s Oxford Economics Papers, pp.185-207.Oswald, A. (1985) The Economic Theory of Trade Unions An Introductory Survey Scandinavian Journal of Economics, volume 87.Brown, J. and Ashenfelter, O (1986, June) Testing the Efficiency of Employment Contracts Journal of Political Economy, volume 94.Katz, L. and Summers, L. (1989) Industry rents Evidence and Implications Brookings Papers on Economic Activity, Microeconomics.Krueger, A. and Summers, L. (1988, March) Efficiency wages and the inter-industry wage structure Econometrica, volume 56Stiglitz, J. (1987, March) The Causes and Consequences of the dependence of quality on price Journal of Economic Literature, volume 25.Cowell, F.A. (2004, December) Microeconomics Principles and Analysis STICERD and Department of Economics, London School of Economics.Autor, D.H. (2003, November) Lecture Note Efficiency Wages, Shapiro-Stiglitz Model MIT and NBER.Koutsoyiannis, A. (1979) Modern Microeconomics Macmillan.1