Wage and employment determination in a dynamic insider–outsider model

Abstract

In this paper, I develop a differential insider–outsider game in which a union of corporative incumbents chooses the wage of its members by taking into account the optimal employment policy of a firm that, in turn, is assumed to decide the number of outsiders to hire in a spot labour market. Under the assumption that incumbents cannot be fired and commit themselves to a given path of wages, I demonstrate that such a game displays an open-loop Stackelberg equilibrium in which the initial stock of insiders pins down the trajectories of incumbents, entrants and insider wages. Moreover, resorting to numerical simulations, I show that adjustments towards the steady-state equilibrium occur through asymmetric oscillations that mimic the decline of union membership and union wage premia observed in the US all over the last 20 years. In addition, I show that the model provides a positive relationship between the labour market power of the insider union and the impatience of the firm.