Substitutability of Inputs

The Argument

Bargaining power of a union depends heavily on how fast its members can be replaced by outsiders or members of other unions. Naturally, several unions act as competitors if their members are substitutes.

Oswald (1979) provides a framework for the analysis. It is straightforward to represent substitutability by means of the labour demand function:

L_i =L(w₁, . . . , w_k)

Labour demand depends on the own wage wi and the wages of all other (k−1) unions/professional groups (w₁, . . . , wi−1, w_i+1, . . . , w_k). In general, dL_i/dw_i < 0. The signs of the dL_i/dw_j, j 6= i depend on the elasticity of substitution between factor i and j. If inputs are substitutes dLi/dwj > 0, with complementary inputs, we havedL_i/dw_j <0. Since the basic argument is straightforward, we do not repeat the formal discussion in Hoel et al. (1993) here, but sketch only the intuition.

If inputs are substitutes, unions act as competitors or – formulated in the game-theoretic approach of Horn & Wolinsky (1988) – one union’s members can be used as scabs against the wage claims and strike threads of other unions. This simple reasoning predicts that unions (professional groups) merge in order to prevent competition if their members are gross substitutes.

It is simple to show that centralisation increases wages in the case of substi-tutes and decreases them with complements (for a formal argument see Hoel et al., 1993). Therefore, the theory does not only allow an evaluation of wage and efficiency aspects but also explains whether centralisation occurs.

Empirical Relevance

If mobility of workers is low, the competition effect is important only for regional labour markets. Current examples from German labour markets suggest, however, that centralisation with respect to profession/occupation may be an issue of growing importance in the future. The departure of the

‘Pilotenvereinigung Cockpit’ from the Deutsche Angestellten Gewerkschaft (DAG) was associated with extremely high wage demands. Similarly, the German train driver union attracted attention through high wage claims and the refute to bargain together with the general union Transnet. Both professions are apparently highly specialised and difficult to replace. And both unions use this power in order to push up the wages of their members.⁴³ Unfortunately, the predictive power of the theory vanishes if one tries to explain international differences in centralisation of wage setting. For ex-ample, it is hard to explain the high importance of professional unions in the United Kingdom and its low importance in Germany since the industrial structure of the both countries appears to be highly similar. A glimpse at

43Remarkably, the behaviour of these groups was not welcomed by employers as a valu-able pioneering action towards greater decentralised wage setting.

the historical literature shows that the predecessors of English and German unions (e.g. journeyman clubs) were quite different already in the eighteenth century and that organisational structures show extreme inertia (an issue mostly ignored in the economic theory.) Granted this observation, the exis-tence of powerful umbrella organisations may hinder privileged professional groups to break rank and so may help to avoid negative consequences of decentralisation.

On the other hand, the literature on skill biased technical change (SBTC) stresses negative effects of centralisation with respect to profes-sion/qualification. For example, Acemoglu, Aghion, & Violante (2001) ex-plain decreasing unionisation rates by SBTC, arguing that increasing skill premia erode solidarity between skill groups, inducing the more qualified workers to leave unions. Furthermore, the empirical literature on SBTC ap-pears to be a possible source for information regarding substitutability of worker groups. However, we have to admit that we did not try to trace it in detail because the definition of skill groups is rather coarse in most applica-tions (unskilled, skilled and college graduates in most cases), and therefore we do not expect that it reveals much evidence regarding cooperation be-tween skill groups. We already know that unions predominantly represent the medium skilled, that density is highest among this group, and that college graduates are hardly organised in unions. The empirical evidence presented in Acemoglu et al. (2001) does not go beyond that.

Instead of regarding occupational groups, we could resort to the spatial dimension of competition and use fluctuation of workers as a proxy for com-petition between workers or unions. In this interpretation, unions have a stronger incentive to merge or build regional cooperation clusters if regional mobility of workers is high. A view at table 2.1⁴⁴ shows that this na¨ıve the-ory is not confirmed by the data. According to the data, the USA should have the (regionally) most centralised labour market with a worker fluctua-tion rate of 96.2%⁴⁵, followed by Canada (92.6%), Finland (77.0%), the UK (74.8%), and Italy (68.1%). Fluctuation is rather low in Germany (63.0%) and even lower France (59.6%) and Japan (39.1%). A comparison with the centralisation indicator values in the last column reveals no clear relation between turnover and centralisation of bargaining. (Even if we found one, the bivariate analysis remains prone to spurious correlation bias.)

Also an inspection of the empirical literature on union mergers (see Michelson, 2000 for an introductory survey and Chaison, 1996 for a

book-44The table is an extract from table 19 in Layard & Nickell (1999).

45Turnover is measured as the sum of accession and separation rates. These rates, in turn, are yearly averages and measured as percent of total employment.

Country Period Accession Separation Turnover CD

Belgium 1985 29.0 19.9 41.8 8

Denmark^∗ 1984-1991 29.0 29.0 58.0 4

Finland 1984 40.0 37.0 77.0 5

France 1987 298.9 30.7 59.6 11

Germany 1984-1990 31.6 30.4 62.0 6

Italy 1985-1991 34.5 33.6 68.1 13

Netherlands^∗,a 1990 11.9 10.1 22.0 7

Spain 1993-1994 26.6 28.5 55.1

-Sweden^∗ 1977-1981 16.8 17.8 34.6 3

UK 1967-1985 37.2 37.6 74.8 12

Japan^a 1988-1992 20.2 18.9 39.1 14

Canada 1988 48.2 44.4 92.6 17

USA 1985-1993 - - 96.0 16

USA^∗ 1977-1981 45.2 46.0 91.2 16

Sources: turnover, accession, and separation measures are taken from Layard & Nickell (1999), the centralisation indicator is from Calmfors & Driffill (1988)

Notes: ∗: Manufacturing only, a: continuing firms only

Turnover rates are computed as sum of accession and separation rates.

All numbers are yearly averages.

CD: ranking of countries according to the Calmfors & Driffill-indicator of centralisation.

Higher indicator values correspond to more decentralised bargaining. (Some positions in the range{1, . . . ,17}are empty, since fluctuation data is not available for some countries, e.g. Austria which occupies range 1 of the ranking)

Table 2.1: Worker accession, separation, and turnover rates in percent length treatment) does not yield valuable results. Surprisingly, these articles focus on the organisational, administrative, membership acquisition, and cost aspects of mergers,but disregard competition issues. It is unclear whether we should interpret this as evidence against the relevance of competition, or as hint to a blind spot in this strand of research.

We found only one empirical study investigating centralisation with re-spect to profession/occupation: Machin, Stewart, & Reenen (1993). In an econometric analysis of firm data from England,⁴⁶ the authors find that the presence of several unions has no significant effect on wages if they bargain jointly. If bargaining is conducted independently, however, significant wage

46The use the Workplace Industrial Relations Survey (WIRS) 1984.

markups result.⁴⁷