Abstract
We provide a rationale for the mixed relationship between product market competition and unionized wage, and more importantly, for a generally unexplained empirical evidence of a positive relationship between product market competition and unionized wage. We show that a higher product market competition decreases (increases) unionized wage if the external scale economies are weak (strong). However, a higher product market competition may decrease or increase the unionized wage if the external scale economies are moderate.
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Notes
There are at least two ways through which external economies of scale may affect labor productivities. First, if the labor productivity depends on multiple aspects of the production process and different firms have advantages in different aspects of the production process, knowledge spillover within the industry helps all firms to benefit from each other’s expertise, which, in turn, increases labor productivity when the number of firms rises in the industry. Second, “learning-by-doing” at the industry level might increase labor productivity. Increased product market competition increases total output in the industry, which can create industry wide learning-by-doing and benefit all firms in the presence of knowledge spillover. For the analytical ease, we however, rely on the first reason for our modeling purposes. This notion of external economies comes from Marshall (1890) and has been discussed in many other papers (see, e.g., Griliches, 1992 and Audretsch et al., 2007).
In open shop unions, Corneo (1993) shows that higher product price reduces unionized wage when social custom effects are strong.
Note that a general equilibrium analysis, in this context, is also an important aspect to consider. However, a partial equilibrium analysis allows us to show the implications of external economies of scale only by making our framework otherwise comparable to the existing literature. Similarly, the adoption of Leontief technology makes our results comparable to the cited literature.
As mentioned in footnote 1, knowledge spillover helps firms to learn from each other, which helps to increase their productivities. As more firms enter the market, the benefits from knowledge spillover increase. Here, we assume that knowledge spillover helps all firms symmetrically.
Without any loss of generality, we set the reservation wage equal zero as this does not add any new insights to our work. Needless to say that the qualitative results of our paper still hold for a positive reservation wage.
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Acknowledgements
We would like to thank an anonymous referee of this journal helpful comments and suggestions. We also thank Paulo Bastos, Udo Kreickemeier, and Peter Wright for their comments and suggestions on an earlier version of the paper. The usual disclaimer applies.
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Basak, D., Mukherjee, A. Competition, External Economies of Scale, and Unionized Wage. J Ind Compet Trade 21, 585–592 (2021). https://doi.org/10.1007/s10842-021-00369-1
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DOI: https://doi.org/10.1007/s10842-021-00369-1