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.
