Wage and Employment Determination through Non-Cooperative Bargaining1

This paper investigates wage and employment determination by a group of workers or union and a …rm, making use of the techniques of non-cooperative bargaining. Previous analyses have examined wage determination with an arti…cial restriction that employment is determined either before or after wage determination has occurred. Here, employment determination is made part of the bargaining process. With two variables being determined, there is bargaining with a variable pie and solutions correspond to equilibria without commitment. Two di¤erent notions of e¢ ciency exchange and pie e¢ ciency are relevant and serve to characterise equilibria. Multiple equilibria are shown to arise naturally once exchange ine¢ cient proposals are possible. In all equilibria there is overemployment. Factors which restrict a …rm’s ability to alter the labour force during or after the wage bargaining process are shown, paradoxically, to bene…t the …rm.