Union Wage Rigidity: The Default Settings of Labor Law
Abstract
Current discussions of wage norms begin with George Perry's analysis (1980). He argued that the rate of wage change appeared to shift in discrete steps. Although his study concerned aggregate wage adjustments, the union sector has long been identified as the primary source of wage rigidity and hence of wage norms. The stylized explanation for the rigidity of any market price in the efficient contracting literature is the presence of high transaction costs. High transaction costs emanate from the internal rather than the external labor market. These costs make it inefficient to update wages continuously to changing market conditions. Alternatively stated, wage rigidity or norms is a Nash equilibrium for firms under ordinary circumstances (see Costas Azariadis, 1985). The equilibrium position is maintained until the transaction costs of making the change are less than the costs of maintaining the old regime. Once the regime changes, however, the new regime or equilibrium can be a discrete rather than a marginal change from the prior regime. The regime in the unionized sector today is one of concession bargaining. Although concessions have been concentrated in those sectors that have experienced competition in a setting of deregulation and increased international trade, increased competition is more likely to be a consequence of earlier relative wage and cost changes than an exogenous cause of concessions today.' In fact, the common thread that binds together the industries that have exhibited concession bargaining is that they have emerged from a prior regime of significant and prolonged increases in union wage premiums. Indeed, as shown by Peter Linneman and myself, the increases in union wage premiums have caused a statistically significant and quantitatively large decrease in union employment. Concession bargains thus represent a shift in regimes as the parties attempt to deal with the effects of the prior regime of increasing premiums. There is little doubt that the increase in union premiums was related to the supply shocks of the 1970's; that is, while nonunionized wages declined in response to these shocks, union real wages continued to increase. In this sense, the puzzle is why the unionized sector did not shift to lower wage norms during the 1970's and not the presence of concessions today. The expansion of union wage premiums over the past decade cannot be explained by the traditional model of union-nonunion wage differentials. That model states that premiums remain steady over time unless changes occur in the underlying labor demand elasticities (i.e., the Hicks-Marshall conditions change) or the unions' tastes (reflecting the wages-employment tradeoff). Labor markets, however, have become more rather than less competitive in the 1970's as a consequence of deregulation and increasing international trade. In disequilibrium, variation in the union wage premium can occur due to the fixedcontracting periou'. Indeed, union wage rigidity is typically explained by the existence of 3-year contracts that permit only incomplete wage adjustments during the contract period. In this paper, the extent of union wage rigidity is shown to be related to contracting lags, but the lags are not identified with contract expiration and renegotiation dates. Rather, the lags and the resulting wage rigid* Professor of Economics, Law, and Management, University of Pennsylvania, Philadelphia, PA 19104. Costas Azariadis, David Hall, Clyde Summers, Lea Vandervelde, and Susan Wachter provided many helpful suggestions, and Rodrigo Quintanilla and Nancy Zurich provided valuable research assistance. The research was supported by the Institute for Law and Economics, University of Pennsylvania. 'See Peter Linneman and myself (1986) for a discussion of the endogeneity of increased international competition and, to a lesser extent, deregulation.
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