Is Collective Bargaining Pareto Efficient? A Survey of the Literature

It would be difficult, even today, to argue that labour unions are not important economic institutions, and it is this importance
that makes their consequences for efficiency so substantial. Interest in the economic analysis of unions was revived in the
early 1980s, in large part by a paper by Ian McDonald and Robert Solow, which formalized ideas first expressed in the context
of labour markets 35 years earlier by Wassily Leontief. The standard textbook model of the labour union treats the union as
a conventional monopoly seller of labour, selecting the wage while the firm chooses the level of employment; McDonald & Solow,
however, drew from Leontief’s work to suggest an alternative in which the firm and union negotiate to a Pareto efficient contract.
Further theoretical work followed, and a still-growing empirical literature began to develop; a wide variety of empirical
procedures and tests have been attempted, with a diverse and contradictory range of findings. Given the importance of the
question of union contract efficiency, an up-to-date survey of the literature may be useful in synthesizing past results and
pointing the way to future research, and it is this role which the current paper will attempt to fill.