Wages, Benefits and Efficiency in Union-Firm Bargaining

This paper provides an efficient union-firm bargaining solution within the right to manage framework, by separating efficiency and distributional considerations through bargaining over wage and non-wage benefits. We show that without insurance considerations, efficiency is achieved by equating the wage and workers’ opportunity cost and providing the union with a surplus share in accordance with its bargaining power. We also show that with insurance considerations, the optimal contract, again, equates the wage and workers’ opportunity cost, but it also provides full insurance. There is empirical evidence that non-wage benefits are, indeed, common and play an important role in union contracts.