Wage Determination and the Sources of Bargaining Power

71 Pages Posted: 21 Aug 2002

See all articles by Paola Manzini

Paola Manzini

University of St. Andrews - School of Economics and Finance; Institute for the Study of Labor (IZA)

Dennis J. Snower

University of Kiel - Institute for World Economics (IfW); Institute for the Study of Labor (IZA); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 2002

Abstract

This paper explores the sources of bargaining power in wage negotiations. In the standard analyses of wage bargaining, the negotiation partners are specified a priori, and thus it is impossible to address the question of how they achieve and retain their negotiating positions, on which their bargaining power is based. In our analysis, by contrast, the firm can choose between two sets of wage negotiations: those it can conduct with its incumbent employees and those with new job seekers. These negotiations are imperfectly substitutable, and the degree of substitutability is determined by the firm's labor turnover costs (e.g. costs of hiring, training, and firing). In this context, labor turnover costs not only influence the negotiators' alternative to bargaining (i.e. their fall-back positions and outside options); they affect the nature of the bargaining process itself. This approach leads to a new theory of wage determination.

Keywords: Bargaining, Wage Determination, Labor Turnover Costs, Credibility, Bonding, Churning

JEL Classification: C76, J31, J32

Suggested Citation

Manzini, Paola and Snower, Dennis J., Wage Determination and the Sources of Bargaining Power (July 2002). IZA Discussion Paper No. 535. Available at SSRN: https://ssrn.com/abstract=323587

Paola Manzini

University of St. Andrews - School of Economics and Finance ( email )

North St
Saint Andrews, Fife KY16 9AJ
United Kingdom

HOME PAGE: http://www.st-andrews.ac.uk/~pm210/

Institute for the Study of Labor (IZA)

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

Dennis J. Snower (Contact Author)

University of Kiel - Institute for World Economics (IfW) ( email )

Duesternbrooker Weg 120
D-24118 Kiel
Germany
+49+431-8814-235 (Phone)

Institute for the Study of Labor (IZA)

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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