, Volume 32, Issue 3, pp 282-304
Date: 06 Jul 2011

Is Collective Bargaining Pareto Efficient? A Survey of the Literature

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It would be difficult, even today, to argue that labour unions are not important economic institutions, and it is this importance that makes their consequences for efficiency 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 ideas first 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 firm chooses the level of employment; McDonald & Solow, however, drew from Leontief’s work to suggest an alternative in which the firm and union negotiate to a Pareto efficient contract. Further theoretical work followed, and a still-growing empirical literature began to develop; a wide variety of empirical procedures and tests have been attempted, with a diverse and contradictory range of findings. Given the importance of the question of union contract efficiency, 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 fill.

This paper began its existence as part of my Master’s Essay while I was a student at Queen’s University, where I received a great deal of helpful advice and guidance from Lorne Carmichael, Charles Beach, and Marvin McInnis, for which I am very thankful. I would also like to thank Orley Ashenfelter and an anonymous referee for further helpful comments and suggestions. Any errors or omissions are the responsibilty of the author.