The debate in the trade union literature over whether unions and firms bargain over both wages and employment or wages alone, leaving the firm to determine employment unilaterally, generally assumes that the income of laid-off union members is exogenous. This neglects the existence of intra-union distribution schemes such as severance payments, unemployment insurance, retraining arrangements and early retirement schemes. In Discussion Paper No. 843, Research Fellow Alison Booth develops a `right-to-manage' model in which unions and firms bargain over wages and redundancy payments, to investigate how this affects dismissals and employment.

First, the presence of redundancy pay on the bargaining agenda improves efficiency by making full insurance possible and the marginal productivity equal to the opportunity cost of labour. Second, both the `right-to-manage' and the efficient bargaining models are now characterized by the same efficiency conditions. Third, the efficient outcome is now comparable with that of the implicit contract literature with redundancy pay, but the present result derives from an imperfectly competitive labour market in which unions and firms bargain over wages and redundancy pay; in contrast, the implicit contract result derives from a perfectly competitive labour market in which competitive forces produce an efficient outcome. Fourth, optimal wages and redundancy pay rise with union power, which leaves employment unaffected; this accords with the stylized facts about the extent of redundancy pay to the extent that union density and closed shop arrangements can proxy union power. Optimal wages are also increasing in alternative opportunities, in which employment is decreasing, while their impact on redundancy pay is ambiguous.

Layoffs with Payoffs: A Bargaining Model of Union Wage and Severance Pay Determination
Alison L Booth

Discussion Paper No. 843, November 1993 (HR)