Does collective wage bargaining restore efficiency in a search model with large firms?

Bauer C., Lingens J.

Abstract

Existing search and bargaining models show that firms hire an inefficiently large number of workers. We ask whether decentralised collective wage bargaining may result in a second-best allocation. Collective bargaining restores efficiency when the bargained wage is independent of employment; conditions that we characterise. Firms then behave as if collective bargaining was over both wages and employment, thus linking the large-firm search and bargaining environment to the efficient bargaining model (McDonald and Solow, 1981). Under more realistic conditions, workers can bargain for a share of output, so that the wage is then a function of employment. In equilibrium, firms are too large and firm entry is inefficient. © 2013 Royal Economic Society.