Cyclical Movements in Wages and Consumption in a Bargaining Model of Unemployment

Abstract

This paper considers a model where individual workers bargain with firms over their wages and where their bargaining power is so strong that some workers are unemployed. The result is that an increase in the elasticity of demand facing individual firms raises employment (as in the case where the labor market clears) but that wages rise only modestly. In fact, consistent with the findings of Wilson (1997), some job-specific wages actually fall. Nonetheless, average wages may rise either because wages of non-rationed workers rise or because there is cyclical upgrading of jobs. Assuming that workers are also rationed in financial markets, the increase in employment that accompanies the increase in the demand elasticity for individual products also increases consumption substantially. Thus, the model rationalizes the finding that real wages rise less in booms than does consumption. At the same time, the model is consistent with a lack of secular movements in hours and unemployment as well as a secular proportionality of consumption and real wages.