In Discussion Paper No. 1399, Research Fellow Kai-Uwe Kühn and Research Affiliate Jorge Padilla develop a theory of union bargaining power based on firm-specific skills acquired by the insider work-force. Their model attempts to capture the fact that unions do not simply replace a competitive labour market by a supply monopoly but instead change labour market relations from individual to collective bargaining. It is shown that unions increase the bargaining power of insiders only in states of the world in which the firm would like to retain insiders without hiring outsiders. Union formation leads to inefficient retention of workers in the firm.

Furthermore, new workers are hired at wages below the going market rate. Union power can, however, either increase or decrease the amount of hiring by the firm. Therefore, the authors understand this study as developing an insider-outsider theory in which discrimination of new workers by the insider work-force is neither individually rational nor necessary to explain inefficient hiring decisions or union formation.

A Theory of Union Power and Labour Turnover
Kai-Uwe Kühn and A Jorge Padilla