Efficient Wage Bargaining in a Dynamic Macroeconomic Model

This paper analyzes the implications of bilateral bargaining over wages and employment between a producer and a union representing a finite number of identical workers in a monetary macroeconomic model of the AS--AD type with government activity. Wages and aggregate employment levels are set according to an efficient (Nash) bargaining agreement while the commodity market is cleared in a competitive way. It is shown that, for each level of union power, measured by the share it obtains of the total production surplus, efficient bargaining implies no efficiency loss in production. Depending on the level of union power, temporary equilibria may exhibit voluntary overemployment or underemployment with the competitive equilibrium being a special case. Due to the price feedback from the commodity market and to income-induced demand effects, all temporary equilibria with a positive labor share are not Nash bargaining-efficient with respect to the set of feasible temporary equilibrium allocations. While higher union power induces a larger share of the surplus and a higher real wage, it always implies lower output and employment. Moreover, the induced nominal equilibrium wage is not always a monotonically increasing function of union power. Therefore, all temporary equilibria with efficient bargaining are only ``Second-best'' Pareto optimal, i.\,e.\ bargaining power and production efficiency do not lead to temporary optimality. The dynamic evolution of money balances, prices, and wages is analyzed being driven primarily by government budget deficits and expectations by consumers. It is shown that for each fixed level of union power, the features of the dynamics under perfect foresight are structurally identical to those of the same economy under competitive wage and price setting. These are: stationary equilibria with perfect foresight do not exist, except on a set of parameters of measure zero; balanced paths of monetary expansion or contraction are the only possibilities inducing constant allocations; for small levels of government demand, there exist two balanced paths generically, one of which with high employment and production is always unstable, while the other one may be stable or unstable.