Bargaining:―Monopoly Power Versus Union Power

This book tackles the difficult subject of wage determination in the labor markets ofhighly unionized and concentrated industries where the standard models of competition, monopoly, andmonopolistic competition do not apply. It attempts to bridge the gap between untested, abstractbargaining models and empirical studies that relate wages to "bargaining variables" without thebenefit of formal theory. To do this, the study derives a wage equation from a bargaining model andthen tests this equation on data for manufacturing industries in the United States, drawingconclusions that have important implications for income distribution and for the analysis ofunion-nonunion wage differentials.The study presents a survey of bargaining theories, selects onethat is most applicable -- Nash's theory of bargaining -- and from it constructs a model of the firmunder bilateral monopoly (the situation in which one employer faces one union and both are pricesetters 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 theemployer and the union. These assumptions plus two hypotheses from Nash's theory determine the wagerate, employment, capital stock, output, price and profits under bilateral monopoly. The comparativestatics of this model are examined.The bargaining wage equation derived from the Nash bilateralmonopoly model is then tested on data for several manufacturing industries. Variable construction isdiscussed, and results of estimation and tests are reported. For example, this wage equation can beinterpreted as a Phillips curve to which "bargaining variables" have been added. When estimates ofthe wage equation were compared to estimates of a simple Phillips curve without these bargainingvariables, the equation explained the quarterly movement of average hourly earnings in the testindustries better than the simple Phillips curve, i.e., bargaining variables that were carefullyderived from a formal theory of bargaining significantly reduced unexplained variance.Finally, thebook provides a much-needed theoretical basis for examining the influence of product market forceson wages and for analyzing union-nonunion relative wages.