Does Intra-Firm Bargaining Matter for Business Cycle Dynamics?

44 Pages Posted: 8 Jun 2016

See all articles by Michael U. Krause

Michael U. Krause

University of Cologne

Thomas Lubik

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: 2007

Abstract

We analyse the implications of intra-firm bargaining for business cycle dynamics in models with large firms and search frictions. Intra-firm bargaining implies a feedback effect from the marginal revenue product to wage setting which leads firms to over-hire in order to reduce workers' bargaining position within the firm. The key to this effect are decreasing returns and/or downward-sloping demand. We show that equilibrium wages and employment are higher in steady state compared to a bargaining framework in which firms neglect this feedback. However, the effects of intra-firm bargaining on adjustment dynamics, volatility and comovement are negligible.

Keywords: Strategic wage setting, search and matching frictions, business cycle propagation

JEL Classification: E32, J64, E24

Suggested Citation

Krause, Michael U. and Lubik, Thomas, Does Intra-Firm Bargaining Matter for Business Cycle Dynamics? (2007). Bundesbank Series 1 Discussion Paper No. 2007,17. Available at SSRN: https://ssrn.com/abstract=2785292

Michael U. Krause (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Thomas Lubik

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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