IDEAS home Printed from
   My bibliography  Save this paper

A Theory of Wages and Labour Demand with Intra-firm Bargaining and Matching Frictions


  • Cahuc, Pierre
  • Wasmer, Etienne
  • Marque, François


Firms are the field of several strategic interactions that standard neo-classical analysis often ignores. Such strategic considerations concern relations between capital owner and labour, relations between marginal employees and incumbents and more generally all relations between different groups within the firm with different bargaining positions. This Paper provides a synthetic model of the labour market equilibrium with search frictions in a dynamic framework where wage bargaining is influenced by within-firm strategic interactions, with explicit closed form solutions. We then explore systematically within-firm strategic interactions and shed new light on the micro- and macroeconomic consequences of conflicts on wages, unemployment and capital accumulation. First, we recover the partial equilibrium over-employment phenomenon put to the fore by Stole and Zwiebel (1996a,b) at the firm level, according to which the bargaining power of workers increases employment. Further, with heterogeneous labour, higher relative bargaining power for some groups leads quite generally to over-employment relative to other groups, those other groups being under-employed if they have a lower relative bargaining power. The over-employment results do not necessarily hold at the macroeconomic level, however. Quantitative exercises suggest that the bargaining power of workers is actually detrimental to employment when labour is considered as an homogeneous input. Finally, the hold-up problem between capital owners and employees does not necessarily lead to under-investment in physical capital as it is usually the case. Actually, strategic over-employment can induce over-investment when employees substitutable to capital have strong bargaining power.

Suggested Citation

  • Cahuc, Pierre & Wasmer, Etienne & Marque, François, 2004. "A Theory of Wages and Labour Demand with Intra-firm Bargaining and Matching Frictions," CEPR Discussion Papers 4605, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4605

    Download full text from publisher

    File URL:
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    More about this item


    Strategic wage bargaining; Intra-firm bargaining; Search and matching; Unemployment; Over-employment;
    All these keywords.

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:4605. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.