A Reverse Holdup Problem: When workers’ lack of bargaining power slows economic adjustments

In a model of horizontal matching on the labor market, we show that increasing workers’ bargaining power may increase some employers’ incentive to switch to new production activities. In particular, this could lead to (i) higher wages, (ii) more jobs, (iii) better jobs and (iv) higher profits. Paradoxically, the median voter may object to the economic adjustments because search costs could cut the surplus for a majority of workers, even when it creates jobs for the other ones and increases aggregate surplus.