Arbeitspapier

An Analysis of Labour Adjustment Costs in Unionized Economies

In this paper we conduct a theoretical analysis of the implications of a union which can exploit the existence of firm labour adjustment costs. We consider a model involving a large number of identical firms facing a single, economy-wide union. We solve (i) for the Markov perfect equilibria with no commitment, under the assumption that the union chooses wages each period and firms react by choosing employment, and (ii) for the commitment equilibria where the union can precommit to the entire (infinite) sequence of wages. We conclude that the speed of adjustment of employment, that is higher in the nocommitment case, decreases with adjustment costs in both models. Moreover adjustment costs affect the long run values of employment and wages only in the no-commitment case, i.e., the higher the relevance of adjustment costs the higher the wage and therefore the smaller the level of employment in the long run. Commitment on the part of the union leads to lower wages, and moreover is beneficial to firms as well as to the union. Given that the union would like to commit to a lower path of wages we consider whether reputation building is desirable.

Language
Englisch

Bibliographic citation
Series: IZA Discussion Papers ; No. 225

Classification
Wirtschaft
Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
Labor Demand
Unemployment Insurance; Severance Pay; Plant Closings
Trade Unions: Objectives, Structure, and Effects
Subject
Unions
labour adjustment costs
Markov perfect equilibria
Arbeitsmarkttheorie
Gewerkschaftlicher Organisationsgrad
Lohnpolitik
Arbeitsnachfrage
Anpassungskosten
Beschäftigungseffekt
Lohn
Spieltheorie
Theorie

Event
Geistige Schöpfung
(who)
Modesto, Leonor
Thomas, Jonathan P.
Event
Veröffentlichung
(who)
Institute for the Study of Labor (IZA)
(where)
Bonn
(when)
2000

Handle
Last update
10.03.2025, 11:42 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Modesto, Leonor
  • Thomas, Jonathan P.
  • Institute for the Study of Labor (IZA)

Time of origin

  • 2000

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