The Implications of Trade Liberalization for Labor Union Behavior

This study analyzes a two country model in which labor unions are present. It found the correlation between (union) wages and the number of firms in the country.


The study shows that unions with fewer firms face a stronger pressure for wage moderation through trade liberalization, and because of this, those firms' cost-competitiveness is reinforced.
It supposes the basic two-country model, with both facing a country-specific monopoly union which maximizes rents and represents 100% of the Labor force. The Unions in each country then take a wage given the wage set by the union foreign to them, while taking into consideration the the firms' labor demand functions. Then each firm chooses it's output taking as given both the output of other firms and the union wage.
The study then assumes that each union maximizes its rents, finding a competitive wage level common in both countries. Finding the Nash-Equilibrium level for wages through a series of functions that quite honestly were above my head (sorry), it obtained the relationship between the number of firms and wages. It then implies that in free trade equilibrium, the country with more firms will have a higher wage-rate.
To this implication there were two propositions: Proposition 1 being that "If the two countries liberalize trade, the union with fewer firms will choose a lower wage level compared to the other country's union."
In the proposition it is explain that increased product market competition implies an inward shift on the demand curve of labor for each union, which in turn works to moderate the union's wage setting behavior. Differences in the number of firms determine the competition, and thus the relative pressure for said wage moderation. Basically, the more firms, the more competition and thus the more pressure for an inward shift. However, the number of domestic firms does not affect wage setting behavior in this instance, because the more firms there are, the higher the aggregate labor demand is, and when the union represents all employees, there is no pressure to reduce wages as all firms are paying the same.
The second proposition was that "In the presence of labor unions, a country with a higher autarky price may be an exporter of the good in a trading equilibrium."
This propositions shows a difference between the standard trade model. In those models, a country with a larger number of firms will have a lower autarky price and become a net exporter due to the pressure on wages described above. In this example with labor unions, liberalization of trade affects unions' wage setting behaviors, that in turn has an affect on trade patterns. Therefore, a country with a smaller number of firms and higher autarky prices becomes a net exporter.

Hopefully this post was as clear as possible, it was definitely very hard to condense this information and "dumb it down", even so much that I had trouble writing it. Regardless, it was an interesting study and I urge everyone to take a look at it.

EDIT: okay the link didn't work. The name of the Study is "Trade Liberalization and Labor Unions" by Toru Kikuchi and J. Atsu Amegashie. Give it a google search!