Staggered vs. synchronised wage setting in oligopoly

Abstract

This paper analyses the dynamic equilibrium which emerges when wages are bargained upon at different times in the various firms operating in an oligopolistic industry. Unions set wages, the management of the firms the output level, and the outcome of this interaction is captured by the game-theoretic concept of Markov perfect equilibrium. The steady-state equilibrium is compared with that which would emerge if all wage negotiations occurred simultaneously. It is shown that staggered wage setting leads to higher steady-state levels of wage and unemployment than synchronised wage setting. It is also shown that a longer duration for wage contracts leads, other things equal, to lower wages and higher employment. The final part of the paper shows that allowing for Nash bargaining between union and management and for risk averse unions does not alter the conclusions of the paper.