Full text: Wirtschaft und Gesellschaft - 1993 Heft 4 (4)

19. Jahrgang (1 99.?). Heft 4 Wirtschaft und Gesellschaft 
The basic model of the unions' wage aspirations, as presented by Os­
wald (1985) for example, goes as follows. Suppose union leaders accw·a­
tely represent the interests of their mf'mbers in collective bargaining and 
that union members are concemed with the real consumer wage, w/q 
(the nominal wage w deflated by the consumer ptice index q) and em­
ployment L ( 4). Assume, in addition, that there is a fixed nurober of firms 
in the economy, each with the same labor demand function L (w!p) where 
w/p is the real product price (the wage deflated by the co? of output p) 
with L' (w/p) < 0. The union's problem, then, is to choose the wage rate w 
that maximizes some function 
du d du 0 u (w/q, L) with 0 (w/q) > 0 an oL > 
subject to the constraint that L = L (w!p). 
Consider the simplest possible case where workers are homogeneaus 
and product prices are exogenous, i. e. given by the world market. If we 
choose units such that the price of output for all firms is the same, then 
p = q. Then the union's optimal wage is given by the condition that the 
union members' marginal rate of Substitution between xeal wages and 
employment is equal to the marginal lass of employment produced by an 
increase in the real wage, or 
If the firms are assumed to be identical and prices are assumed to be 
exogenous, the labor demand function reflects the trade-off between 
wages and ernployment for the aggregate economy as well as any sub­
sector of the economy. Under these circumstances, the unions' optimal 
wage dcmand is independent of the degree of centralization. 
2.1. Endogenaus Product Prices 
The assumption that wages have no effect on pmduct prices may be 
accurate for many industries in small open economies, but not for alL 
Where wage increases are passcd on to prices to some extent, the impact 
of a wage increase on the real consumer wage (which union members 
carc about) and on the real product wage (which determines the Ievel of 
employment chosen by profit-maxim1:'.ing firms) may diverge, depend­
ing on thc lcvel of bargaining. 
To analyzc the case with endogenaus prices in the siruplest possible 
setting, consider a closed economy in which each product price can be 
wtitten in reduced form as a function of the wages throughout the eco­
nomy: p = p (w, w*) whcrc w is the wage in the same industry and w* is 
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