Job security, wage bargaining and duopoly outcomes

Abstract

This paper develops a model where labour supply is constrained because training new workers is costly and redundant workers cannot be fired. An entrant draws labour from an incumbent firm through a wage contest while wages in the latter are bargained with its unionized workers. In a Cournot equilibrium, the union's bargaining power has a positive effect on the incumbent's output, but a negative effect on the industry output. Social welfare under duopoly may fall short of the monopoly level. The distribution of bargaining gains within the incumbent firm is sensitive to whether wage and output choices are made sequentially or simultaneously.