A Theory of Wages and Labor Demand with Intra-Firm Bargaining and Matching Frictions

46 Pages Posted: 26 Oct 2004

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

Observatoire Français des Conjonctures Economiques (OFCE); Sciences Po; IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

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Date Written: September 2004

Abstract

Firms are the field of several strategic interactions that standard neo-classical analysis often ignores. Such strategic considerations concern relations between capital owner and labor, relations between marginal employees and incumbents and more generally all relations between different groups within the firm with different bargaining positions. This Paper provides a synthetic model of the labor market equilibrium with search frictions in a dynamic framework where wage bargaining is influenced by within-firm strategic interactions, with explicit closed form solutions. We then explore systematically within firm strategic interactions and shed new light on the micro and macroeconomic consequences of conflicts on wages, unemployment and capital accumulation. First, we recover the partial equilibrium over-employment phenomenon put to the fore by Stole and Zwiebel (1996a,b) at the firm level, according to which the bargaining power of workers increases employment. Further, with heterogeneous labor, higher relative bargaining power for some groups leads quite generally to over-employment relative to other groups, those other groups being under-employed if they have a lower relative bargaining power. The over-employment results do not necessarily hold at the macroeconomic level, however. Quantitative exercises suggest that the bargaining power of workers is actually detrimental to employment when labor is considered as an homogeneous input. Finally, the hold-up problem between capital owners and employees does not necessarily lead to under-investment in physical capital as it is usually the case. Actually, strategic over-employment can induce over-investment when employees substitutable to capital have strong bargaining power.

Keywords: Strategic wage bargaining, intra-firm bargaining, search and matching, unemployment, over-employment

JEL Classification: J30, J60

Suggested Citation

Cahuc, Pierre and Wasmer, Etienne, A Theory of Wages and Labor Demand with Intra-Firm Bargaining and Matching Frictions (September 2004). CEPR Discussion Paper No. 4605. Available at SSRN: https://ssrn.com/abstract=610262

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 )

106-112 Boulevard de l'Hopital
Paris Cedex 13, 75647
France
+33 1 4117 3717 (Phone)
+33 1 4117 3724 (Fax)

HOME PAGE: http://eurequa.univ-paris1.fr/membres/cahuc/

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

Observatoire Français des Conjonctures Economiques (OFCE) ( email )

69 Quai d'Orsay
Paris 75004
France

Sciences Po

56 rue Jacob
Paris Cedex 07, 75337
France

IZA Institute of Labor Economics

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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