Testing the algebraic modeling of competitive impacts from wage premium shocks: a case study from a booming airline market

Labor relations issues such as collective bargaining and strike threat power have recently gained increased attention in the Brazilian air transportation market due to a short-term shortage of qualified workforce, leading stronger pilot unions to demand higher wages and better working conditions. Exacerbated by the notable expansion of the Brazilian economy between 2020 and 2023, where air travel demand surged by 60%, this pressure has driven labor costs to grow more rapidly than other cost categories. This paper examines exogenous flight crew cost shocks, treating these as increases in wage premiums resulting from stronger unionization and higher labor market rents. Using a differentiated duopoly model, we analyze the impact of these wage increases on competition between a major network carrier and a small low-fare carrier, introducing the hypothesis of non-exhausted economies of density. Our findings indicate that smaller airlines are more adversely affected by labor cost shocks, though differentiated wage increase schemes can mitigate these impacts, reducing market concentration and preserving consumer welfare. This study contributes to the literature by incorporating wage premium shocks into existing models and suggesting that labor regulations in Brazil should be liberalized to address the rapid growth in air transportation demand and the resultant workforce shortage.