On the Foundations of Wage Bargaining
This paper provides strategic foundations for the insight that the bargaining power of employees depends on the firm’s labour turnover costs. The analysis shows how these costs determine the firm’s degree of substitutability between two sets of wage negotiations: (i) those the firm conducts with its incumbent employees; and (ii) the alternative negotiations it could conduct with new job seekers. In this context, labour turnover costs not only influence the negotiators’ alternatives to bargaining (i.e. the negotiators’ fall-back positions and outside options); they affect the nature of the bargaining process itself. This approach leads to a new theory of wage determination.
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