A Model of Wage Bargaining Involving Negotiations and Sanctions

This paper presents a model of wage bargaining between an employer and a labour union (or alternatively of collective bargaining). The bargaining is conducted by comparing a claim and an offer at fixed time intervals. These are generated by the respective parties from reaction functions that allow for past submissions and anticipation of future positions. The reaction functions themselves change from one step to the next, and have to be worked out in a sequence. Consequently, the outcome of the process cannot be guessed at the outset. It is assumed throughout that labour slows down production as a sanction, with a total strike as an extreme possibility. Labour may or may not suffer wage losses proportional to the severity of its sanction. Finally, a bluffing strategy is introduced for both parties. The model can serve as a basis for numerical simulation of wage conflicts, and sensitivity tests of behavioural parameters.