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Exploitation of Collective Bargaining in the Labor Market

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  • Saglam, Ismail

Abstract

We consider a collective bargaining model for the determination of labor hours and wages in the presence of a government that can tax corporate income. The original form of this model was developed by Del Rey et al. (2022) in the absence of taxes. Using our modified model with taxes, we investigate whether workers or the firm can exploit the bargaining equilibrium, with the help of Sertel's (1992a) pre-donation idea, by committing to transfer a part of their would-be payoffs to the other party. We show that pre-donation by any party cannot affect the equilibrium hours or the social welfare while it may affect the welfare distribution in the economy if and only if the corporate tax rate is positive. In case this tax rate is positive, we find that making pre-donation to the firm is beneficial for workers. Moreover, the optimal pre-donation of workers enables them to fully extract the tax revenue that the government could obtain in the absence of pre-donation while keeping the welfare of the firm unchanged. On the other hand, making pre-donation to workers is harmful to the firm and beneficial for the government while having no effect on the welfare of workers.

Suggested Citation

  • Saglam, Ismail, 2023. "Exploitation of Collective Bargaining in the Labor Market," MPRA Paper 117588, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:117588
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    References listed on IDEAS

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    1. Kalai, Ehud & Smorodinsky, Meir, 1975. "Other Solutions to Nash's Bargaining Problem," Econometrica, Econometric Society, vol. 43(3), pages 513-518, May.
    2. Del Rey, Elena & Naval, Joaquín & Silva, José I., 2022. "Hours and wages: A bargaining approach," Economics Letters, Elsevier, vol. 217(C).
    3. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, vol. 71(5), pages 896-908, December.
    4. Grout, Paul A, 1984. "Investment and Wages in the Absence of Binding Contracts: A Nash Bargining Approach," Econometrica, Econometric Society, vol. 52(2), pages 449-460, March.
    5. Ismail Saglam, 2022. "Pareto gains of predonation in monopoly regulation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(4), pages 817-854, August.
    6. Christopher J. Ellis & John Fender, 1985. "Wage Bargaining in a Macroeconomic Model with Rationing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(3), pages 625-650.
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    Keywords

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    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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