LAYOFFS WITH PAYOFFS - A BARGAINING MODEL OF UNION WAGE AND SEVERANCE PAY DETERMINATION

Popular characterizations of trade union preferences assume that the income of laid-off union members is exogenous. Given the widespread existence of (partial) intra-union distribution schemes including severance pay, this paper provides a model of union-firm bargaining in which workers' layoff income is endogenously determined. Where unions and firms bargain over wages and severance pay, workers' incomes are invariant to their employment status, and the wage corresponding to the level of ex post employment is equal to the opportunity cost of labour. The equality of marginal productivity to the opportunity cost of labour (which is a necessary and sufficient condition for the bargaining surplus to be maximized) characterizes employment in both the right-to-manage and the efficient bargaining union models, and has implications for empirical research trying to distinguish between these two approaches. The bargaining model developed in this paper can also be compared with the outcome of the implicit contract model with redundancy pay; but a crucial point of difference is that the result in this paper derives from a unionized labour market where unions and firms bargain over wages and redundancy pay, while the implicit contract result derives from a perfectly competitive labour market in which competitive forces lead to an efficient outcome.