Uncertainty, Unions and the Theory of Public Sector Labour Markets

Abstract

Although public sector unionism is growing throughout the industrialized nations, and there is widespread interest in the question of how such labor markets operate, little theoretical work has been done on these problems. The paper develops a two sector general equilibrium model in which a government and a public sector union together negotiate an efficient contract. Public sector wages turn out to be sticky compared to those in the private sector, and there is over-employment in the publicly run half of the economy. The model's features are rather different from those in the private contract literature. Extensions of the model to include union-run insurance, endogenous membership, missing capital markets and public goods are also considered.

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