Trade unions, efficiency wages and employment

This short paper combines three of the main theories of the labour market (the shirking, turnover cost and union-firm bargaining models) in an integrated framework to highlight the consequences of their interactions for the determination of the wage and the firm's labour demand. We show that bargaining and both efficiency wage theories are mutually reinforcing, leading to higher wages. Like Weiss (1990), Fehr (1991) and Garino and Martin (2000), we find a "backward bending" labour demand curve along which the employment level increases with the wage for some range. However, the aim of this note is to show that the negotiated wage is always located on the downward sloping portion of the labour demand curve, whatever the source of the efficiency wage effects involved.