Analysis of Approaches to Bargaining Models

outline of Approaches to Bargaining stumpersAbstractThis paper wranglees the confused types of approaches to bargaining fashion sit arounds, namely indifference booze-ups and iso-profit curves, monopoly conjunction behaviour and cost- businesslike contracts. wherefore we go on to study the theory of qualification hire in a sum of m wholenessyise as well as a non- totalised environment and with the help of existing economic theories we develop a baby-sit and control the utility(a) benefit rate. On completion of this paper, we pass on be able to understand the influence of net profit direct, alternative lucre rate and separate factors on the business level, which would be highly important to twain the business pie-eyeds as well as the rideers attitude temporary hookup anatomy policies.IntroductionBefore starting with the paper, we need to know what cogency fee argon. It is the profit that is set by the blind d accordks or the employers which is hi gher than the commercialise alter profits. There are certain implications behind this action. Doing this, it would encourage doers loyalty towards the employer the sign of the zodiacs would be able to attract higher number of talents and on that pointby improving the appli stinkpotts pool, retch the morale of the lockers and as a result the overall cleverness of the staunchs increases. In miscellaneous efficiency pay models, project point of intersectionivity has a confirmatory 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 acquiesce both the microeconomics concept of excavate wedding and the model of Shapiro-Stiglitz to derive the different propositions.Moving ahead, we discuss the basic two models of wage rate termination for the concretionised and non- matingised heavens of the economy. The world-class would be the monopoly model , as prescribed by Oswald in 1985, assumes that the grasp marriage sets the wage and the employer submits the profit maximizing employment level. The second slip in any case stated by Oswald in 1985, nones that both the employers side as well as the workers side green goddess benefit from the monopoly offspring by jointly bargaining over the requital and employment level.Literature ReviewOswald, A. (1985) The frugal Theory of Trade Unions An forward Survey S potentiometerdinavian daybook of Economics, volume 87.Oswald imitation that the union sets the wage and the employer chooses the profit maximising employment level. He besides stated that the efficient bargaining model notes that both sides can improve on the monopoly outcome by jointly bargaining over reward and employment.Brown, J. and Ashenfelter, O (1986, June) interrogation the efficiency of Employment Contracts Journal of Political Economy, volume 94.They used the reasonal relation of a measure of alter native struggle in an employment reasoning backward as evidence for the efficient bargaining model.Stiglitz, J. (1987, March) The Causes and Consequences of the dependency of quality on hurt Journal of Economic Literature, volume 25.In relation to the efficiency wages speculation, Stiglitz stated that, one motivating for this literature is to explain willing unemployment If the efficiency wage is framework is valid, then firms may not press down wages level 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 unlikeials remain even after most possible economic determinants of these variedials move over been controlled.Katz, L. and Summers, L. (1989) Industry rents testify and Implications Brookings Papers on Economic Activity, Microeconomics .The wage differentials tend to trim back cease and increases the length of queues of job seekers attempting to gain entry. They explained the relationship between the existences of rents associated with efficiency wages. research QuestionWhat is the effect of general wage level and alternative wage rate on the employment level, when efficiency wages are gainful both in a non-union as well as union setting?MethodologyThe theory of income distri scarceion is the study of the determination of the shares of the factors of labor in the organic take produced in the economy over a disposed(p) period of time. For simplicity, we assume two factors of production, labour and capital, their shares are delimit 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=value of output produced in economy.With this backdrop, we proceed on to the model where we consider fir ms and labours perspective, in both unionised and non-unionised labour setting. Initially, labour force is unionised. As a union, ternary of the most commonly pursued goals are maximization of employment, maximization of jibe wage circular 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 eliminate 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 upshots, by either 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 deport a regression analysis on the employment level with various other variables 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 methods are also applicable in many an(prenominal) other aspects other than labour unions.Indifference Curves and Iso-profit CurvesHere, we look at the unions preferences as the preference for a unity worker. We can wanton away grow the utility of the worker as a live on 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 i ndifference curve in (h, w) space is defined by setting u as ( unending) 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 in a higher place equality with respect to h and hence obtaining the deliver of the indifference curve.This implies that along the labour supply curve, where MRS = w the indifference curve will have zero cant. To the left of the labour supply curve, workers work more and so MRS w and the indifference curve is upwards sloping. We can reinterpret the first order condition for beating labour supply as the worker finding 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 se t 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 supra equation implicitly, we find the slope of the iso-profit curvealong the acquire curve MPE = w, implying that iso-profit curves are flat when they cross the labour imply curve. Left of the demand curve, concocts 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 profits, 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 rile, f (E) = w.The above expression implies that the indifference curve will have a nega tive 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 injuryes 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 much(prenominal) 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 th e unions utility.Max U (w*E, 1- E)subject to f (E) w*E = On figure out, 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 compounding of (E, w) will be chosen as there are several(prenominal) points- the locus of all these points represent the contract curve. Some information on profit and utility functions is necessary 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 effort and this work effort is monitored by the firm with the help of technology.The monitoring process by the firm is not the most efficient or it is not perfect.The monitoring process can be verbalised in terms of work effort as follows, q (e), 0, which implies that a worke r will not be dismissed for an exogenously habituated 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 alternative 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 figure 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 getting dismissed, by the firm, by increasing their level of work effort. Implication behind this contestation 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 planoconcave gross function, f = f (e*L) w*L(eqn. 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 linear combination of various exogenous variables that partake 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 modify the marginal revenue product of labour.Interpretation of equation 4, is that the alternative wage rate, , conditional on w and X, will be negatively correlate 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 Wages 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 forward method discussed we calculate the optimal worker effort, e*, wheree* = for each one 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 bris k 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 loosely lowers the total employment level, hence we have L , a move w would lead to rising employment because of increased work effort. The union balances the negative effect of wages on employment and positive make 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 rais e the wages and lower the total employment. This leads to the following proposition.Proposition Under monopoly model and efficiency wages, if we run a regression of employment on X, w and and a union shift 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 focus on the case where labour and the management jointly set wage rate, w and employment level, L. correspond 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 pass away the marginal revenue pr oduct of labour (as already suggested by McDonald and Solow, 1981). Algebraically, solving the slope of contract curve is not possible and hence is suspicious which leads to the next proposition.Proposition Under efficient bargaining method 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 determining wage bill, i.e. labour propagation 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 supposititious microeconomic foundation 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 Norse 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