Rest Unemployment and Unionization∗

This paper examines the impact of unions on unemployment and wages in a dynamic equilibrium search model. Unions impose a minimum wage on employers and ration jobs to ensure that their most senior members are employed. A minimum wage policy is optimal for a utilitarian union that cares equally about its employed and unemployed members. The combination of a minimum wage and rationing by seniority generates rest unemployment, where following a downturn in their labor market, unionized workers are willing to wait for jobs to reappear rather than search for a new labor market. Introducing unions into a dynamic equilibrium model has two implications, which others have argued are features of the data: the hazard of exiting unemployment at long unemployment durations is very low when the union-imposed minimum wage is high; and a high union-imposed minimum wage generates a compressed wage distribution and a high turnover rate of jobs. ∗We are grateful for research assistance by Ezra Oberfield. Shimer’s research is supported by a grant from the National Science Foundation.