Involuntary Unemployment and Intrafirm Bargaining with Replacement Workers

Melbourne Business School Working Paper No. 2000-07

20 Pages Posted: 9 May 2000

See all articles by Catherine de Fontenay

Catherine de Fontenay

University of Melbourne - Melbourne Business School

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

Date Written: April 6, 2000

Abstract

This paper reconsiders the result of Stole and Zwiebel (1996) that when a firm bargains with its workers over the wages in non-binding contracts, the firm will over-employ workers to reduce the hold-up power of any one. This result has stood in contrast to conclusions drawn in the literature on involuntary employment that bargaining would lead to un- or under-employment. We demonstrate that the Stole-Zwiebel conclusion critically relies on the lack of replacement workers. When insiders can be easily replaced from a finite pool of workers, then the firm chooses to under- rather than over-employ workers. Only when the replacement pool of workers is infinite do neoclassical outcomes occur. Moreover we demonstrate that the key driving force between the differing conclusions of these models is the degree of substitutability between replacement and insider workers.

JEL Classification: C70, D23, J41, J64

Suggested Citation

de Fontenay, Catherine C. and Gans, Joshua S., Involuntary Unemployment and Intrafirm Bargaining with Replacement Workers (April 6, 2000). Melbourne Business School Working Paper No. 2000-07, Available at SSRN: https://ssrn.com/abstract=221895 or http://dx.doi.org/10.2139/ssrn.221895

Catherine C. De Fontenay

University of Melbourne - Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

Joshua S. Gans (Contact Author)

University of Toronto - Rotman School of Management ( email )

Canada

HOME PAGE: http://www.joshuagans.com

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States