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American Economic Review: Vol. 98 No. 4 (September 2008)

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The Limited Influence of Unemployment on the Wage Bargain

Article Citation

Hall, Robert E., and Paul R. Milgrom. 2008. "The Limited Influence of Unemployment on the Wage Bargain." American Economic Review, 98(4): 1653-74.

DOI: 10.1257/aer.98.4.1653

Abstract

When a job-seeker and an employer meet, find a prospective joint surplus, and bargain over the wage, conditions in the outside labor market, including especially unemployment, may have limited influence. The job-seeker's only credible threat during bargaining is to hold out for a better deal. The employer's threat is to delay bargaining. Consequently, the outcome of the bargain depends on the relative costs of delays to the parties, rather than on the payoffs that result from exiting negotiations. Modeling bargaining in this way makes wages less responsive to unemployment. A stochastic model of the labor market with credible bargaining and reasonable parameter values yields larger employment fluctuations than does the standard Mortensen-Pissarides model. (JEL J22, J23, J31, J64)

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Authors

Hall, Robert E. (Stanford U)
Milgrom, Paul R. (Stanford U)

JEL Classifications

J22: Time Allocation and Labor Supply
J23: Labor Demand
J31: Wage Level and Structure; Wage Differentials
J64: Unemployment: Models, Duration, Incidence, and Job Search


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