Is Collective Bargaining Pareto Efficient? A Survey of the Literature


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.

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