A Nonuniform Pricing Model of Union Wages and Employment

Unlike implicit contracts models, the nonuniform pricing model of unions assumes that firms can always shut down ex post to avoid any payments to the union. Under this restriction, employment can differ from a first-best even if both workers and firms are risk neutral. In general, the union chooses to offer quantity discounts on labor and needs to use a seniority rule that regulates the order in which workers are hired to implement these discounts. Unions lower (almost) all workers' employment probabilities and increase the cyclical volatility of employment, and the union-nonunion average wage differential will move countercyclically. Workers' preferences over union wage profiles, conditional on their seniority, exhibit (within limits) a convenient "unanimity" property.