Labor Market Efficiency, Wages and Employment When Search Frictions Interact with Intrafirm Bargaining

18 Pages Posted: 30 May 2001

See all articles by Pierre Cahuc

Pierre Cahuc

National Institute of Statistics and Economic Studies (INSEE) - National School for Statistical and Economic Administration (ENSAE); Université Paris I Panthéon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA); University of Angers - French National Center for Scientific Research (CNRS); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Etienne Wasmer

New York University (NYU) - New York University Abu Dhabi; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2001

Abstract

In search of a macroeconomic theory of wage determination, the agnostic reader should be puzzled by the apparent contradiction between two influential theories. On one hand, in the standard search-matching theory with wage bargaining, hiring cost and constant returns of labor, the bargaining power of employees allows them to get rents and gives rise either to overemployment or to underemployment compared with the first best. On the other hand, in Stole and Zwiebel's theory of intrafirm bargaining with no hiring cost and decreasing returns of labor, the bargaining power of employees does not allow them to get rent and always gives rise to overemployment. In this Paper, we try to reconcile these approaches. A simple matching model with large firms and diminishing marginal productivity of labor allows us to show that the two limit cases described above yield a mix of robust and non robust results: in the most general case, employees get rents and there is more frequently overemployment compared to the efficient allocation than in the standard search-matching model.

Keywords: Overemployment, search, wage bargaining

JEL Classification: J30

Suggested Citation

Cahuc, Pierre and Wasmer, Etienne, Labor Market Efficiency, Wages and Employment When Search Frictions Interact with Intrafirm Bargaining (May 2001). Available at SSRN: https://ssrn.com/abstract=271701

Pierre Cahuc (Contact Author)

National Institute of Statistics and Economic Studies (INSEE) - National School for Statistical and Economic Administration (ENSAE) ( email )

92245 Malakoff Cedex
France

Université Paris I Panthéon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA) ( email )

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University of Angers - French National Center for Scientific Research (CNRS)

106-112 Boulevard de l'Hopital
75647 Paris Cedex 13
France
+33 4 44 07 82 06 (Phone)
+33 4 44 07 82 02 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Etienne Wasmer

New York University (NYU) - New York University Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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