How Trade Unions Promote Cooperation Among Workers

Many of the alleged labor market reforms rely on the popular view that the high and rising European unemployment rate is due to several forms of harmful rigidities. The presence of strong trade unions is one of those distortions this paper is trying to understand better. What seems a wage rigidity may in fact be the result of a rational game-theoretical agreement for the good of all workers, even unemployed. In a simple partial equilibrium model, it is considered a labor market where a trade union tries to encourage cooperation without compulsion. With respect to the solution proposed by Solow (1990), it is explicitly taken into account the actual explanation of a wage above the competitive level and the risky nature of each period income. By reducing the variance of expected income a trade union can also provide a positive insurance effect. In contrast to Booth (1984), it is argued that the median worker, and not only the median union member, is strictly better-off by joining the organization. This additional step allows us to explain the Ghent System applied in Belgium, Denmark, Finland and Sweden.