EFFICIENCY WAGES, TRADE-UNIONS, AND EMPLOYMENT

This paper integrates union bargaining into an efficiency model with i mperfect monitoring of worker performance. The model is used to examin e the effects of an increase in the benefit replacement ratio on wages , employment, and effort. It is shown that, in contrast to both standa rd shirking and trade union models, these effects are all ambiguous. I n particular, if unions have some bargaining strength, a higher replac ement ratio may reduce wages and increase employment Whenever employme nt is increased the level of effort falls.