Abstract
In this paper, we explore the way in which different bargaining settings affect labour market fluctuations by means of an analytical apparatus that has never been used for this purpose. Specifically, modelling wage negotiations as a problem of stochastic optimal control, we analyze how productivity disturbances shape the dynamics of output, employment, and wages by focusing on the way in which firms’ technology and workers’ preferences interact with the adjustment rules of employment underlying the bargaining process. With a quadratic production function and risk averse workers, we show that wage negotiation outcomes whose employment adjustments go in the direction of the labour demand of the firms match the cyclical behaviour of the involved variables but fail to replicate the observed wage rigidity. By contrast, we show that wage bargaining outcomes whose employment adjustments target the contract curve of two negotiating parties are also able to deliver a strong degree of wage stickiness.
Highlights
The way in which firms and workers bargain over wages and sometimes over employment probably is one of the most important institutional features underlying the determination of labour market outcomes
On the basis of our numerical simulations, we find that with a quadratic production function and risk averse workers, Page 3 of 20 102 wage bargaining outcomes whose employment adjustments go in the direction of the downward-sloping labour demand schedule of the representative firm—like the ones implied by the right to manage and the monopoly union models—match the cyclical behaviour of the involved economic variables but fail to replicate the observed real wage rigidity
We find that wage bargaining outcomes whose employment adjustments target the upward-sloping contract curve of two negotiating parties—like the ones implied by the efficient bargaining model— replicate the co-movement of the economic variables taken into consideration but are able to deliver a strong degree of wage stickiness that is missing when employment adjustments target an inefficient locus
Summary
The way in which firms and workers bargain over wages and sometimes over employment probably is one of the most important institutional features underlying the determination of labour market outcomes (cf. Nickell 1997; Nickell and Layard 1999; Blanchard and Wolfers 2000). Given the production technology available to firms and the preferences of workers, we aim at contributing to the normative literature on dynamic wage bargaining by exploring how different negotiation settings may affect labour market fluctuations in an intertemporal setting without time discontinuities similar to the ones usually employed in differential games of bargaining (e.g., Leitman 1973; Petrosyan and Yeung 2014). On the basis of our numerical simulations, we find that with a quadratic production function and risk averse workers, Page 3 of 20 102 wage bargaining outcomes whose employment adjustments go in the direction of the downward-sloping labour demand schedule of the representative firm—like the ones implied by the right to manage and the monopoly union models—match the cyclical behaviour of the involved economic variables but fail to replicate the observed real wage rigidity (cf McDonald and Solow 1981; MaCurdy and Pencavel 1986).
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