Two-tier collective wage bargaining in a frictional labor market

Unions are common in modern wage setting practices and, in many countries, collective bargaining occurs on two levels, where central negotiations are supplemented with local adjustments. I develop a model of such two-tier wage bargaining in a frictional labor market  where firms face an upward-sloping labor supply curve. I show that the interaction between two-tier bargaining and labor supply is non-trivial and yields some surprising results. Specifically, the centrally negotiated wage floor, which is the outside option wage in local negotiations, affects the outcome in qualitatively different ways depending on its level. A high wage floor becomes the local wage outcome, and raising such a wage floor directly raises the wage. When the wage floor is low, on the other hand, firms want a higher bargained wage to ensure sufficient labor supply. Quite unexpectedly, raising such a wage floor reduces the wage, as it, due to labor supply effects, strengthens the firm's bargaining position. Depending on the parametric configuration, the model can deliver either outcome in equilibrium, and distinct outcomes to, as well as, for example, higher employment than, the corresponding one-tier bargaining arrangements.

A note on employment and wages in individual and collective wage bargaining

This note employs search-and-matching theory to study two common wage-setting regimes: collective bargaining at the firm and individual bargaining at staffing agencies, from which firms rent workers. When firms face decreasing returns to labor in production, both regimes yield identical employment levels, despite union wages exceeding staffing wages. Intuitively, under collective bargaining, although the higher wage works to raise the marginal cost of labor, firms have an incentive to hire additional workers to reduce the bargained wage for all employed workers, offsetting the higher wage. As a result, marginal labor costs---and thus employment---are the same across regimes.

In-house hiring versus staffing agencies

Nowadays, many producing firms do not hire workers, but rent them from “staffing agencies”, whose main activity is to find, employ, and rent out workers. Thus, producing firms do not bear the direct costs of search. We employ search-and-matching theory to analyze this phenomenon. We find, first, that if producing firms have decreasing returns to scale, a pure staffing arrangement delivers lower employment and lower wages than a pure in-house hiring arrangement. Second, and most importantly, in a market equilibrium where producing firms can choose between hiring workers and renting staffers, the unique outcome is one where in-house hiring is not used. Intuitively, under decreasing returns, in-house workers' threat to leave is powerful, and committing to staffers limits this power.

Identity capital and wealth accumulation

We develop a theory of identity capital. Identity is built up around a “life project” that can take many forms and in which individuals invest time and/or money; identity capital is a stock measure capturing these investments. In this paper, we study the life project of building a firm and its possible relevance for the high propensity to save of rich entrepreneurs and the rise of risky portfolio shares in wealth. We introduce identity capital into a dynamic consumption-savings model with uninsurable idiosyncratic risk with the key assumption that decumulating identity leads to a utility loss, while building it up renders no utility gain. We find that identity management makes individuals reluctant to downsize when the firm’s financial prospects are weak as well as to invest when they are strong. We also find that, at least in parts of the wealth-identity space, the risky portfolio share increases in wealth, a result that is hard to obtain in standard models with constant relative risk aversion.