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Does intra-firm bargaining matter for business cycle dynamics?

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  • Krause, Michael
  • Lubik, Thomas A.

Abstract

We analyse the implications of intra-firm bargaining for business cycle dynamics in models with large firms and search frictions. Intra-firm bargaining implies a feedback effect from the marginal revenue product to wage setting which leads firms to over-hire in order to reduce workers' bargaining position within the firm. The key to this effect are decreasing returns and/or downward-sloping demand. We show that equilibrium wages and employment are higher in steady state compared to a bargaining framework in which firms neglect this feedback. However, the effects of intra-firm bargaining on adjustment dynamics, volatility and comovement are negligible. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2007,17.

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Date of creation: 2007
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Handle: RePEc:zbw:bubdp1:6138

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Keywords: Strategic wage setting; search and matching frictions; business cycle propagation;

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References

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  1. Eric Smith, 1999. "Search, Concave Production, and Optimal Firm Size," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 456-471, April.
  2. Antonella Trigari, 2009. "Equilibrium Unemployment, Job Flows, and Inflation Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 41(1), pages 1-33, 02.
  3. Monique Ebell & Christian Haefke, 2002. "Product market deregulation and labor market outcomes," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 726, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2003.
  4. Krause, Michael U. & Lubik, Thomas A., 2007. "The (ir)relevance of real wage rigidity in the New Keynesian model with search frictions," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(3), pages 706-727, April.
  5. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Organizational Design and Technology Choice under Intrafirm Bargaining," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 195-222, March.
  6. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 112-32, March.
  7. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 25-49, March.
  8. Cahuc, Pierre & Marque, François & Wasmer, Etienne, 2004. "A Theory of Wages and Labour Demand with Intra-firm Bargaining and Matching Frictions," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4605, C.E.P.R. Discussion Papers.
  9. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 36(2), pages 269-300, November.
  10. Julio J. Rotemberg, 2008. "Cyclical Wages in a Search-and-Bargaining Model with Large Firms," NBER Chapters, in: NBER International Seminar on Macroeconomics 2006, pages 65-114 National Bureau of Economic Research, Inc.
  11. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  12. Cahuc, Pierre & Wasmer, Etienne, 2001. "Does Intrafirm Bargaining Matter In The Large Firm'S Matching Model?," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 5(05), pages 742-747, November.
  13. repec:cup:macdyn:v:5:y:2002:i:05:p:742-747_03 is not listed on IDEAS
  14. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
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Citations

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Cited by:
  1. Nicolas Groshenny, 2009. "Evaluating a monetary business cycle model with unemployment for the euro area," Reserve Bank of New Zealand Discussion Paper Series DP2009/08, Reserve Bank of New Zealand.
  2. Michael U. Krause & Thomas A. Lubik & David López-Salido, 2008. "Inflation dynamics with search frictions : a structural econometric analysis," Working Paper, Federal Reserve Bank of Richmond 08-01, Federal Reserve Bank of Richmond.
  3. Renato Faccini & Salvador Ortigueira, 2008. "Labor-Market Volatility in the Search-and-Matching Model: The Role of Investment-Specific Technology Shocks," Economics Working Papers, European University Institute ECO2008/39, European University Institute.
  4. Philipp Kircher & Leo Kaas, 2010. "Efficient Firm Dynamics in a Frictional Labor Market," 2010 Meeting Papers, Society for Economic Dynamics 89, Society for Economic Dynamics.
  5. Fabien Tripier, 2010. "The Efficiency of Training and Hiring with Intra firm Bargaining," Working Papers hal-00449625, HAL.
  6. O'Farrell, Rory, 2012. "The effect of international firm mobility on wages and unemployment," Labour Economics, Elsevier, Elsevier, vol. 19(6), pages 931-943.
  7. Michael U. Krause & David J. Lopez-Salido & Thomas Lubik, 2007. "Do Search Frictions Matter for Inflation Dynamics?," Kiel Working Papers 1353, Kiel Institute for the World Economy.
  8. Anton A. Cheremukhin, 2011. "Labor matching: putting the pieces together," Working Papers, Federal Reserve Bank of Dallas 1102, Federal Reserve Bank of Dallas.
  9. Cacciatore, Matteo, 2014. "International trade and macroeconomic dynamics with labor market frictions," Journal of International Economics, Elsevier, Elsevier, vol. 93(1), pages 17-30.
  10. Atanas Hristov, 2010. "The High Sensitivity of Employment to Agency Costs: The Relevance of Wage Rigidity," SFB 649 Discussion Papers SFB649DP2010-044, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  11. Sanjay K. Chugh & David M. Arseneau, 2009. "Tax Smoothing in Frictional Labor Markets," 2009 Meeting Papers, Society for Economic Dynamics 202, Society for Economic Dynamics.

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