Knowledge that Transforms

economic models ; economic theory

A two-state model of strikes, in which both the entrepreneur and the worker randomize their behavior, is developed. The entrepreneur always asks for a wage reduction unaccompanied by a cut in labor services if the state is bad, and he sometimes makes the same request in the good state. The worker sometimes agrees to this request and sometimes threatens to strike. The strike threat is only carried out in the bad state. This equilibrium can Pareto dominate that found in the standard asymmetric information contracting model.

Firms' incentives to inform workers about their future viability are analyzed using a two-period signaling model. I find that, if wages can be set after firms learn their viability, they will perfectly signal firms' closure plans. Mandatory-notice laws, if they have any effect at all, reduce worker utility and raise profits because they obviate the need for "permanent" firms to signal via higher wages. If a noncontingent wage must be set before any private information arrives, pooling occurs in the absence of legislation, and mandatory-notice laws can be Pareto improving.

This article explores a model in which a union confronts many competitive workers, firms, and consumers. Under "monopoly" unionism, union coverage may be incomplete; then, union wages and employment are insensitive to product demand variation. Under "efficient" unionism, coverage can never be incomplete; some union variables necessarily vary with product demand. Preliminary evidence on the demand independence under incomplete coverage hypothesis is presented. Also, more structure is imposed and further hypotheses are derived, and the manner in which the model can be enriched to allow for a variety of union-related issues within a consistent framework is set out.

Wage changes in a sample (1979-86) of Canadian wage contracts are analyzed. The sample is split into cost-of-living allowance (COLA) and non-COLA contracts. Econometric estimation corrects for sample selectivity bias. In non-COLA contracts, the unemployment rate and a proxy for expected inflation are significant. Expected industry price changes and productivity changes exert smaller but significant effects. In COLA contracts, ex ante inflation coverage ranges between 60% and 100% of expected inflation. Catch-up for previous uncompensated inflation, the unemployment rate, and expected inflation are also significant. A common wage structure across COLA and non-COLA contracts is rejected by the data.

This article derives three dynamic models of worker effort determination, based on a shirking efficiency wage model, a compensating differentials model, and a union-firm bargaining model. It shows that all of these three models have the same long-run comparative statics but differ in their short-run dynamics. We use these different predictions about the dynamics as a basis for testing the models. Euler equations for each model are estimated using panel data on 486 U.K. companies. The evidence supports the shirking model in firms with low levels of unionization but the bargaining model in highly unionized industries.

Preunemployment search is the fundamental labor market process generating beneficial effects of advance notice. Yet theory indicates that workers receiving notice may not search, whereas others may search even without advance notice. Our weighted results indicate that over one-third of all nonnotified workers still search and over 40% of workers receiving notice do not respond by searching. Further, preunemployment search determinants differ for notified (nonnotified) workers and men (women). For notified men, search is strongly increased by longer notice and strongly decreased by higher unemployment insurance benefits. But neither factor affects the employed search decisions of notified women.