Centre for Discrete and Applicable Mathematics

 CDAM Research Report, LSE-CDAM-2002-08

July 2002

Market Selection Hypothesis and Wage-Employment Bargaining

Alberto Pompermaier


This paper analyses an industry in which firms and enterprise unions bargain over wages and employment. In modelling the unions objective function we account for the market selection hypothesis so that unions care about profits. The bargaining outcome implies lower wages and higher profits, while employment/output is higher or lower depending on whether the union has more bargaining power over wage or over employment. If the union has more bargaining power over employment, an increase in product market competition may lead to higher profits and output and lower employment and wages. Finally, productive efficiency is raised by an increase in competition as the existence of the monopolistic rent becomes more uncertain.

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