Wage bargaining as an optimal control problem: A dynamic version of the right-to-manage model

This paper aims at representing wage bargaining as an optimal control problem. Specifically, assuming that employment follows a stock-adjustment principle towards the stochastic level that maximizes entrepreneurs' profits, I builds an inter-temporal optimizing model in which the real wage is continuously set by an infinitely-lived arbitrator called in to solve the dispute between workers and employers. This theoretical proposal verifies the natural presumption about real-wage bargaining and suggests that unions are far from having a destabilizing role but, on the contrary, they may well speed up the adjustment to equilibrium. Moreover, I show that when unions do not care about unemployed workers, static bargaining models understate wage negotiation distortions.