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The Limited Influence of Unemployment on the Wage Bargain

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  • Robert E. Hall
  • Paul R. Milgrom

Abstract

When a job-seeker and an employer meet, find a prospective joint surplus, and bargain over the wage, conditions in the outside labor market, including especially unemployment, may have limited influence. The job-seeker's only credible threat during bargaining is to hold out for a better deal. The employer's threat is to delay bargaining. Consequently, the outcome of the bargain depends on the relative costs of delays to the parties, rather than on the payoffs that result from exiting negotiations. Modeling bargaining in this way makes wages less responsive to unemployment. A stochastic model of the labor market with credible bargaining and reasonable parameter values yields larger employment fluctuations than does the standard Mortensen-Pissarides model. (JEL J22, J23, J31, J64)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 4 (September)
Pages: 1653-74

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:4:p:1653-74

Note: DOI: 10.1257/aer.98.4.1653
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  1. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  2. Robert E. Hall, 2005. "Employment Efficiency and Sticky Wages: Evidence from Flows in the Labor Market," NBER Working Papers 11183, National Bureau of Economic Research, Inc.
  3. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  4. A Rosen, 1992. "An Equilibrium Search-Matching Model of Discrimination," CEP Discussion Papers dp0097, Centre for Economic Performance, LSE.
  5. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  6. Holden, Steinar, 1997. "Wage Bargaining, Holdout, and Inflation," Oxford Economic Papers, Oxford University Press, vol. 49(2), pages 235-55, April.
  7. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, vol. 72(5), pages 968-79, December.
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