INVESTMENT,EMPLOYMENT AND WAGES: A BARGAINING APPROACH

This paper analyzes a three stage game between a firm and its unionized workers. In the first period the firm decides the level of its capital stock. In the second period union and firm bargain over how many workers to hire and the wage rate, then production takes place. In the third stage new production occurs after union and firm have bargained over possible changes in the employment level and wage rate. The hiring of workers is associated with sunk training costs. The main result is that distortions in the use of labor due to sunk training costs induce distortions in the use of capital, even in the absence of sunk investment costs. Because of the strategic impact of investment on later stages of the game, the firm will not equate marginal revenue product and rental cost of capital. Underinvestment or overinvestment will result depending on whether the marginal revenue product of labor is an increasing or decreasing function of capital.