Is Collective Bargaining Pareto Efficient? A Survey of the Literature

Abstract

It would be hard, even today, to deny that labour unions are important economic institutions, and it is this importance that makes their consequences for e ciency so substantial. Interest in the economic analysis of unions was revived in the early 1980s, in large part by a paper by Ian McDonald and Robert Solow which formalized, algebraically and graphically, ideas which were rst expressed in the context of labour markets 35 years earlier by Wassily Leontief. The standard textbook model of the labour union treats the union as a conventional monopoly seller of labour, selecting the wage while the rm chooses the level of employment; McDonald & Solow, however, drew from Leontief's work to suggest an alternative in which the rm and union negotiate to a Pareto e cient contract. Further theoretical work followed, and a still-growing empirical literature began to develop, a signi cant portion of it dedicated to testing McDonald & Solow's model against the traditional labour demand curve theory. A wide variety of empirical procedures and tests have been attempted, with a diverse and contradictory range of ndings; given the importance of the question of the e ciency of union contracts, an up-to-date survey of the literature may be useful in synthesizing past results and pointing the way to future research, and it is this role which the current paper will attempt to ll.