Markets and property rights, as institutions, can benefit from government guidance and regulation in societies that lack accepted norms and laws to govern productive market behavior. While it is generally accepted that unions lower employment levels in an industry because of the wage premiums they obtain, there is less agreement on how unions affect an industry's response to changes in output demand. By obtaining a greater percentage of their compensation in fixed fringe benefits that firms may have to pay even after a worker is laid off, unions discourage employment change. Empirical results show that unions are associated with greater changes in work hours and wages for a given change in output. We examine the effect of the market power of unions on the wage of unionized labor.
Market power is measured as the percent of an industry's labor force that is unionized.
Unique in this study is the simultaneous treatment of the union wage and extent of union organization as union choice variables. We model this choice in a setting of product market competition with unrestricted entry. An important empirical implication is that standard wage equation estimates of the effect of union coverage on union wages are biased upward. The relevant features of this model are summarized and the geometrical representation of IS and LM curves in the original model and some of its variants is discussed. It is argued that within Hicksian IS-LM models these logical inconsistencies do not arise and that the conventional aggregate demand curve is not really needed to determine the price level.