Seniority Rules and the Gains from Union Organization

Abstract

This paper examines the optimality of several seniority provisions which are common to U.S. union contracts. The paper focuses on the attempts by the initial union members to maximize their return from organizing the union. An overlapping generations model is used in the analysis. Seniority wage increases are found to serve as implicit initiation fees and thus serve as one means of appropriating rents from future union members. Layoff rules are shown to be optimal only when the organizers are constrained in the types of contracts they can write. Without these constraints, the optimal contract provides full insurance making layoff rules unnecessary. The paper concludes with a plausible set of constraints which organizers may face and discusses the conditions necessary for seniority layoff rules to result.