Efficiency wages, trade unions, and employment

This paper integrates union bargaining into an efficiency model with imperfect monitoring of worker performance. The model is used to examine the effects of an increase in the benefit replacement ratio on wages, employment, and effort. It is shown that, in contrast to both standard shirking and trade union models, these effects are all ambiguous. In particular, if unions have some bargaining strength, a higher replacement ratio may reduce wages and increase employment Whenever employment is increased the level of effort falls.