Labour Adjustment Costs in a "Right to Manage" Model.

In this paper we study a "right to manage" model of dynamic wage bargaining between a union and a firm which takes into account the costs of adjusting employment. Its main aim is to study how equilibrium levels of employment and wages react in firing and hiring costs. The main result says that turnover costs decrease the variability of the optimal employment plan. During booms (slumps) the optimal amount of labour is lower (higher) than it would be in the absence of turnover costs. The effect on wages depends on the specification of the production function.