Efficient Wage Bargaining as a Repeated Game

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. Oxford University Press is collaborating with JSTOR to digitize, preserve and extend access to The Quarterly This paper builds a bridge between the two existing approaches for wage and employment determination in a unionized market: the monopoly union model and the efficient bargaining model. Both fail to capture the dynamic aspects of wage bargaining. When the repeated nature of the wage bargaining process is considered, the equilibria are neither as inefficient as the monopoly union model predicts nor as fully efficient. Rather, the two models can be regarded as particular cases with certain discount rates. We apply our model to issues such as the endgame interpretation of the U. S. steel industry, wage concessions, and featherbedding. *We thank Olivier Blanchard, Ramon Caminal, Lawrence Katz, Randy Kroszner, Lawrence Summers, and an anonymous referee for helpful comments and suggestions. Financial support from Gobierno Vasco and from The Korea Foundation for AdvancedStudies is gratefully acknowledged. 1. However, the monopoly union model does not fully fit the wage bargaining observed in practice. Firms and unions bargain about the wage (the wage is not simply imposed by the union), although firms retain the right to manage the employment level. See Nickell [1982] and Nickell and Andrew [1983] for the "right to manage model." ? 1989 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies

“…Note that this simplification is only possible in models with linear demand and quadratic effort costs. In other models, the efficient variable wage is not necessarily constant, as it has been pointed out in the literature on monopoly unions and efficient bargaining, see, e.g., McDonald/Solow (1981) or Espinosa/Rhee (1989).…”

Union Wage Demands with Footloose Firms

“…This would force even extremely short-minded unions to take into account that firm relocation is a real possibility (see Espinosa and Rhee, 1989;Addison and Chilton, 1998). Governments also seem to serve as an intermediate which enables unions to make credible commitments.…”

“…When organised at the sector level, even short sighted unions should be aware that at any point in time at least a fraction of firms in the sector will be at the end of an investment cycle, such that some relocation will occur in response to wage increases. Moreover, if firms value future profits highly, then even with long-lived fixed localised investment where relocation would hurt the firm in the short-run, the threat of relocation becomes credible and relevant even to extremely myopic unions (see Espinosa and Rhee, 1989;Addison and Chilton, 1998). One example of such a strategy may be the decision of the Spanish car manufacturer SEAT (part of Volkswagen) to partially relocate the production of the SEAT Ibiza model from Martorell in Spain to Bratislava in Slovakia in 2003 after failed negotiations with unions.…”

Empirical Specifications for a General Equilibrium Analysis of Labor Market Policies and Adjustments

“…Abowd and Lemieux (1993) estimate a simple model of efficient wage-setting. Espinosa and Rhee (1989) extend standard bargaining models to allow for repeated bargaining. 21 Empirical evidence supporting efficient bargaining models include MaCurdy and Penclavel (1986), Brown and Medoff (1986), and Brown and Ashenfelter (1986) 22 .…”