Monopolistic Employers and Unionized Employees: An Unholy Alliance

It is well known that monopoly power in product markets is an important and pervasive phenomenon. Visiting CEP macro program member Monique Ebell has examined the impact of monopoly power in product markets on labour markets. From first principles, firms with monopoly power maximize profits by restricting output below the level associated with optimal social welfare. Lower output implies lower labour demand, leading to lower levels of employment and wages, and greater unemployment.

In recent work with Christian Haefke Monique shows that the size of output, employment and wage reductions, as well as the increase in unemployment, depend crucially on the way in which wages are determined. Under individual bargaining - when each worker negotiates separately with his or her employer - increased monopoly power serves primarily to reduce wages, while having scant impact on output, employment and unemployment. Under collective bargaining - when a union negotiates in the name of all the firm's workers - increases in monopoly power lead to large reductions in output and employment, while increasing unemployment substantially. This is due to unions' ability to obtain a share of profits, so that unions and firms are both interested in reducing output to maximize profits.

In addition, the degree of monopoly power held by a firm is important in determining whether workers will wish to organize into a union or not. The main benefit to workers from unionization is the ability to obtain a share of profits. When those profits are large - when monopoly power is substantial - unionization is attractive. As competition increases, however, profits shrink, as do the benefits to unionization.

In related work with Albrecht Ritschl Monique also look at the impact of unions on stock market values. Workers bargaining individually do not share in firm's profits, while workers bargaining collectively do. As a result, a switch to collective bargaining reduces the firm's profits and stock market value. Ebell and Ritschl find that changes in the ability of workers to bargain collectively are able to account both for the stock market boom during the 1920s and the infamous 1929 crash. In addition, a switch to collective bargaining under the high degree of monopoly power present during this period can account for the catastrophic fall in output and employment, and the sharp increase in unemployment associated with the Great Depression.

The general framework developed by Monique and her collabourators can be used to address a wide variety of interesting questions. For example it can explain why high monopoly power continental Europe displays higher rates of both unionization and unemployment. It can also be used to argue that the competition-enhancing Carter/Reagan product market reforms were a potential source for the declines in unemployment in the United States during the 1980s and 1990s. And it can provide an explanation for the behavior of both stock markets and the real economy during the Great Depression. In future work Monique plans to apply her framework to examining the impact of the Thatcher reforms on the British economy in the 1980s, the effects of unionization on the British economy both after WWI and during the post-WWII recovery, and asking why some stock market crashes lead to recessions while others do not.

To read more about Monique Ebell's work on the effect of monopoly power on labour markets see:

• "Product Market Deregulation and the U.S. Employment Miracle" [Full document in Adobe PDF] (Monique Ebell and Christian Haefke), CEP Discussion Paper 0874, June 2008
  
  
• "Real Origins of the Great Depression: Monopolistic Competition, Union Power, and the American Business Cycle in the 1920s" [Full document in Adobe PDF] (Monique Ebell and Albrecht Ritschl), SFB 649 Discussion Paper SFB649DP2007-006, February 2007