Working Paper: CEPR ID: DP882
Authors: Eric Smith
Abstract: This paper presents a simple search and bargaining economy in which firms use concave production. Because a firm and worker negotiate over the worker's marginal productivity, the firm's wage is a function of its labour force. Reacting to this wage function, firms choose an excessively large and inefficient number of workers. They overemploy, but because too few firms exist in equilibrium, aggregate employment and vacancies are suboptimal. Imposing a fixed exogenous wage, for example by legislating a minimum wage or through union contracting, reduces this inefficiency.
Keywords: search; bargaining; firm size; minimum wages; unions
JEL Codes: J30; J41; J50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm size (L25) | marginal productivity (D24) |
| wage bargaining (J52) | employment levels (J23) |
| minimum wage legislation (J38) | employment levels (J23) |
| minimum wage legislation (J38) | vacancies (J63) |
| fixed wages (J33) | productivity (O49) |
| unions (J51) | productivity (O49) |
| firm size (L25) | overall employment (J21) |
| wage setting (J38) | employment levels (J23) |
| firm size (L25) | vacancies (J63) |