Labor Unions

February 25, 2011

Just a quote:

4.4 Labor Unions

Labor unions, whether company or industry, can, by collective action, protect employees’ firm-dependent values. Employees who have made their own investments in firm-specific skills in response to employer promises, or who have earned rights to future insurance and retirement benefits, want to monitor the employer’s performance and restrain the employer from expropriating those firm-specific rewards. This is a major defense of unions and if this were their only function, firms would not object to them. After all, an employer who borrows from a bank does not oppose monitoring by the bank, as the monitoring makes the loan cheaper. Despite this beneficial effect of organized employees, firms fear the reverse risk of employees expropriating employers’ quasi-rents.

-Armen Alchian and Susan Woodward, “Reflections on the Theory of the Firm,” Alchian’s Collected Works Vol. 2, p. 311

P.S. A quasi-rent is like a reward for past investment. Once you have invested in skills to perform a specific job, you won’t quit if they give you a lower wage, because your skills mean you are still earning more in that job than you could in another.

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