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An analysis of labour adjustment costs in unionized economies

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  • Modesto, Leonor
  • Thomas, Jonathan P.

Abstract

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 no-commitment 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.

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Bibliographic Info

Article provided by Elsevier in its journal Labour Economics.

Volume (Year): 8 (2001)
Issue (Month): 4 (September)
Pages: 475-501

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Handle: RePEc:eee:labeco:v:8:y:2001:i:4:p:475-501

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  1. Daniel S. Hamermesh & Gerard A. Pfann, 1996. "Adjustment Costs in Factor Demand," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1264-1292, September.
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  4. de la Croix, David & Palm, Franz & Pfann, Gerard, 1993. "A Dynamic Contracting Model for Wages and Employment in three European Economies," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1993021, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  5. Albert Marcet & Ramon Marimon, 1992. "Communication, commitment, and growth," Discussion Paper / Institute for Empirical Macroeconomics 74, Federal Reserve Bank of Minneapolis.
  6. Celentani, Marco & Pesendorfer, Wolfgang, 1996. "Reputation in Dynamic Games," Journal of Economic Theory, Elsevier, vol. 70(1), pages 109-132, July.
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  10. Nickell, Stephen, 1979. "Unemployment and the structure of labor costs," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 11(1), pages 187-222, January.
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  12. Pfann, Gerald A. & Verspagen, Bart, 1989. "The structure of adjustment costs for labour in the Dutch manufacturing sector," Economics Letters, Elsevier, vol. 29(4), pages 365-371.
  13. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August.
  14. Fudenberg, D., 1991. "Maintaining a Reputation when Strategies are Imperfectly Observed," Working papers 589, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
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  17. John Kennan, 1988. "Equilibrium Interpretations of Employment and Real Wage Fluctuations," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 157-216 National Bureau of Economic Research, Inc.
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Cited by:
  1. Modesto, Leonor, 2004. "Unions, Firing Costs and Unemployment," IZA Discussion Papers 1157, Institute for the Study of Labor (IZA).
  2. Leena Rudanko & Per Krusell, 2011. "Unions in a Frictional Labor Market," 2011 Meeting Papers 320, Society for Economic Dynamics.
  3. Gugler, Klaus & Yurtoglu, B. Burcin, 2004. "The effects of mergers on company employment in the USA and Europe," International Journal of Industrial Organization, Elsevier, vol. 22(4), pages 481-502, April.

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