On the Foundations of Wage Bargaining
CEPR Discussion Paper Series #1514
Posted: 16 Apr 1997
Date Written: November 1996
This paper provides strategic foundations for the insight that the bargaining power of employees depends on the firm's labor turnover costs. The analysis shows how these costs determine the firm's degree of substitutability between two sets of wage negotiations: 1) those the firm conducts with its incumbent employees; and 2) the alternative negotiations it could conduct with new job seekers. In this context, labor turnover costs not only influence the negotiators' alternatives to bargaining (i.e., the negotiators' 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.
JEL Classification: C78, J31, J32
Suggested Citation: Suggested Citation