Bargaining Versus Efficiency Wages in a Dynamic Labor Market: A Synthesis

We construct a model integrating the efficiency wage model of Shapiro-Stiglitz (1984) with the matching-bargaining models of Diamond, Mortensen and Pissarides (DMP). Firms and workers form pairwise matches, workers may shirk on the job, and the wage is set in an asymmetric Nash bargain over the surplus created by nonshirking. The wage is then always higher, and employment lower, than in both the corresponding Shapiro-Stiglitz and DMP models. When firms determine workers ’ efforts unilaterally, efforts are inefficiently low and lower than in both the Shapiro-Stigitz and DMP models. Bargaining over both wages and effort raises effort, possibly to the firstbest level. The overall equilibrium allocation may then be more or less efficient than in the Current theoretical modelling of unemployment in dynamic labor markets involving nonunionized workers is dominated by two paradigms. The first is the efficiency wage-shirking model, following the seminal paper by Shapiro and Stiglitz (1984), whereby unemployment is required at equilibrium to ensure that workers put up a required effort, given that effort cannot