Dynamic collective bargaining and labor adjustment costs

Abstract

Collective bargaining between a trade union and a firm is analyzed within the framework of a monopoly union model as a dynamic Stackelberg game. Adjustment costs for the firm are comprised of the standard symmetric convex costs plus a wage-dependent element. Indeed, hiring costs can turn into benefits assuming wage discrimination against new entrants. The union also bears increasing marginal costs in the number of layoff workers and decreasing marginal benefits in the number of new entrants. Starting from a baseline scenario with instantaneous adjustment, we characterize the conditions under which the adjustment costs for the firm, or for the union, lead to higher employment and lower wages or vice versa. More generally, these adjustment costs, when they affect both the union and the firm, are generally detrimental to employment. However, the standard symmetric element of the adjustment costs for the firm positively affects employment, even with lower wages. Finally, if hiring and firing costs are defined separately, then hiring and firing could take place simultaneously if the wage discrimination towards new entrants is strong, because the firm would agree to pay the costs of firing incumbent employees, in order to enjoy wage savings from new entrants.