Wage bargaining and employment

Abstract

One of the perennial problems 01 business cycle theory has been the search for a convincing empirical description and theoretical explanation of the behaviour of wage rates during fluctuations in output and employment. Even the empirical question is hardly settled, although the most recent careful study (Geary and Kennan) confirms the prevailing view that real-wage movements are more or less independent of the business cycle. There are really two subquestions here. The first presumes that nominal wage stickiness is the main route by which nominal disturbances have real macroeconomic effects, and asks why nominal wages should be sticky. The second focuses on real wages, and asks why fluctuations in the demand for labour should so often lead to large changes in employment and small, unsystematic, changes in the real wage. We address only the second of these subquestions. We do so in the context of explicit bargaining over wages and employment by a trade union and a firm or group of firms, though one could hope that the results might apply loosely even where an informally organized labour pool bargains implicitly with one or more long-time employers. We do not harbour the illusion that trade unions are the only important source of wage stickiness. There are other plausible (and im­ plausible) stories. Some, like this one, rest partially on optimizing decisions; others do not. The impulse to this study was macroeconomic, but our focus is on a single employer and a single labour pool. Our methods, and therefore our conclusions, are entirely partial equilibrium. If the short-run mobility of labour is slight, and if fluctuations in real aggregate demand affect many sectors synchronously, then perhaps the mechanism we uncover here could be important in the business cycle context. But the work of embedding it in a complete macroeconomic model remains to be done. We begin with a model in which the union is a simple monopolist, setting the