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Wage and employment contracts as equilibria to a bargaining game : an empirical analysis

University of British Columbia

The object of this research is to study how unions and firms divide the surplus or rents available to them. Many instruments are used in practice to make this division, but standard micro data only includes two: wages and employment. I use a new approach to study wage and employment contracts as I consider them equilibrium points in a noncooperative bargaining game. This work is an extension of wage-employment determination models, the extension being the incorporation of a bargaining model, specifically, a Rubinstein bargaining game. Given the objective functions of the two players, the wage and employment equations are specified by the equilibrium conditions for the game. Also, additional determinants of the contracts are identified. One of the characteristics of the model is that the wage and employment contracts are affected by the relative strike costs of the two negotiating parties even in the absence of strikes. The data involve the B.C. wood products industry and the IWA, a powerful union believed to have been successful at capturing rents. The data include input and output quantities and prices and equations representing input demands and output supply are estimated simultaneously with the negotiated wage and employment equations. Four estimation models are derived corresponding to two bargaining frameworks and two sets of assumptions on the firms' technology. The two bargaining frameworks correspond to two polar cases that have been assumed in the wage-employment determination literature: in one case, the wage is set through bargaining while the employment level is chosen by the firm, in the second case, both the wage and employment level are negotiated. In one pair of models, output is treated as exogenous to the bargaining while in the second set of models, output is endogenous and capital is exogenous. The bargaining game is successfully implemented in the sense that technology and union utility parameters are generally reasonable and comparable to previous estimates. Also, the determinants of relative strike costs enter significantly in the estimation. The union is seen to care about employment as well as the wage with slightly more weight being placed on the employment level. Rent maximization is always rejected. Bargaining powers are calculated at each data point and results indicate that the 1980's recession increased the relative power of the union. The hypotheses of equal bargaining powers and complete union bargaining power are tested and rejected. Also, the proportion of rents captured by the firm is found to be a poor indicator of its bargaining power. Although the qualitative results mentioned above are robust across the four models, parameter values are generally sensitive to both the technology assumptions and the bargaining framework. Ignoring the simultaneity of wages, employment and other variables chosen by the firm can be very misleading. Finally, the model in which both wages and employment are negotiated consistently performs better than the framework in which employment is unilaterally set by the firm.

Text

2010-07-29

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http://hdl.handle.net/2429/27001

Economics

University of British Columbia

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