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The Level of Wage Bargaining as a Firm–Union Choice
Author(s) -
Roberts Mark A.
Publication year - 1997
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/1467-9485.00060
Subject(s) - economics , reservation wage , unemployment , wage bargaining , wage , remuneration , bargaining problem , externality , microeconomics , reservation , labour economics , pareto principle , macroeconomics , operations management , finance , political science , law
There is a trade‐off between central bargaining which allows local externalities to be internalized and local bargaining which gives firms and unions the scope to determine both wages and employment simultaneously and efficiently in the sense of McDonald and Solow (1981). A model of strong unions is presented where workers are also concerned with relative wages. The trade‐off is resolved by the individual firm and union on the basis of choice, using the Pareto‐criterion. In the presence of a small extra contract cost under local bargaining, the main findings are: (i) central bargaining is Pareto‐optimal only for extreme values of the reservation income level—a change in unemployment remuneration may cause centralization to breakdown; and (ii) centralization may also be sustained as a suboptimal Nash‐equilibrium through workers’ concern with relative wages—the familiar Keynesian coordination failure.