Wage and Employment Determinations in a Dynamic Model with Bilateral Monopoly

Abstract

This paper develops a model to explain wage and employment movements that result from collective bargaining between a union and firm. The wage and employment setting rules are explicitly derived, using linear optimal control theory, from the union and firm objective functions and a simple model of the aggregate economy. The model is tested using data from the transportation equipment industry. Unlike previous work this model is dyna- mic, permitting feedback effects from past union/firm decisions to affect current decisions. The optimal control methodology is outlined in sufficient detail to acquaint those unfamiliar with the technique. While the statistical properties of this application are disappointing, the results point towards employment being historically a significant factor in the UAW social welfare function.