The Incentives to Make Commitments in Wage Bargains

Alistair Ulph

The Review of Economic Studies, 1989, vol. 56, issue 3, 449-465

Abstract: It is commonly believed that a workforce of identical workers will be better off organised in a single union rather than separate unions that bargain independently with an employer, for this will prevent the employer playing off one union against another. In this paper I show that there are circumstances where this need not be the case. If it is impossible for the firm and workers to sign long-term binding contracts on wages and employment, then the firm will wish to invest in a capital stock below the efficient level; by organising in separate unions the firm will be induced to raise its level of investment, to ensure it has enough capacity with each union to make a threat to switch production to another union credible. The effect on workers' payoffs from a higher capital stock can outweigh the loss of bargaining power as a result of the workforce being in separate unions. There will also be circumstances where the firm will invest in a capital stock that exceeds the efficient level.

Date: 1989
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