Union-Firm Bargaining Under Alternative Pay Schemes: Does Performance Related Pay Fair Better?

This paper compares and contrasts equilibrium outcomes under right-to-manage bargaining (RTM) and efficient bargaining (EB) corresponding to two alternative pay schemes, fixed wage vis-a-vis piece-rate. It shows that with a strong labour union, bargaining over piece-rate generates higher social welfare than bargaining over fixed wage. Moreover, in case of piece-rate pay scheme, social welfare under RTM exceeds that under EB, if the union is very strong. It also shows that, under EB, in case of piece-rate wage schedule output, union’s payoff, profit, and social welfare are higher, but employment is lower than fixed wage pay scheme. However, under RTM the wage rate, output, and union’s payoff are not necessarily higher in case of piece-rate wage schedule compare to fixed wage pay scheme