Wage Bargaining, Unemployment and Happiness

Tobias Kronenberg, UNU-MERIT

This paper incorporates recent findings from experimental economics and the happiness literature into a labour market model with efficiency wages and central wage bargaining. Experimental economics provides evidence for reciprocal behaviour by workers, which motivates the use of a gift-exchange model. The happiness literature suggests that there is a non-pecuniary benefit to work which implies that the loss of a job generates two types of cost, a financial and a nonfinancial one.
This paper presents a utility function for the individual worker which is consistent with the above-mentioned findings and yields, under utility maximization, an effort function that is similar to the ones used in other studies. The labour union’s utility function is constructed by aggregating over the individual workers’ utility functions. This provides a strong link between the macroeconomic behaviour of the labour union and the microeconomic behaviour of workers.
The resulting model is consistent with previous findings. An increase in unemployment benefits or the union’s relative bargaining power raises wages and reduces employment. It also offers some new insights. In some cases workers may be willing to work even if their wage income is lower than the unemployment benefit. An increase in the importance of the perception of fairness raises the income of firm owners and has ambiguous results on wages and employment.

Date: 06 March 2006