revised version published as 'Preferences for Collective Versus Individualised Wage Setting' in: Economic Journal, 2008, 119 (540), 1440-1463
Firing frictions and renegotiation costs affect worker and firm preferences for rigid wages
versus individualized Nash bargaining in a standard model of equilibrium unemployment, in
which workers vary by observable skill. Rigid wages permit savings on renegotiation costs
and prevent workers from exploiting the firing friction. For standard calibrations, the model
can account for political support for wage rigidity by both workers and firms, especially in
labor markets for intermediate skills. The firing friction is necessary for this effect, and
reinforces the impact of both turbulence and other labor market institutions on preferences for
rigid wages.
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