84
Karl Ove Moene and Michael Wallerstein
operation equal zero. For a given wage, the
number of firms in operation is determined
by the price. At a higher price, more firms
earn enough to cover their wage costs and
fewer plants are shut down.
Figure 1 illustrates the dispersion of
plants according to their productivity in the
case in which the rate of productivity growth
is constant over time. Plants are arrayed from
youngest to oldest, with revenue per plant
drawn as a declining exponential curve. If r is
the common wage paid in all plants, the
intersection of horizontal line at the level of r
and the revenue curve determines the age at
which employers would close a plant. Thus
θc in Figure 1, is the age of the oldest plant
in operation.
Plants younger than θc earn positive
profits. Firms will open new plants as long as
the expected present value of profits earned
over the plant's operating life exceed the ini-
tial investment cost. If the supply curve of
new plants is rising, the number of new
plants that are built each period is determi-
ned by the condition that the present value
of the future profit stream of the last plant
built equal its cost.^
Decentralized Wage-Setting
With decentralized bargaining, workers in
each plant bargain separately. In a pure sys-
tem of local bargaining, wage contracts do
not extend beyond the individual firm or
plant. Even when local wage bargaining takes
place within a frame agreement negotiated at
a higher level, the outcome is equivalent to
purely local bargaining if local bargainers are
free to call strikes or lockouts when pressing
their demands (Moene, Wallerstein and Hoel
1993:100-103).
As long as employment at the plant
level is determined by the capital equipment
installed, union members will want the hig-
hest wage possible subject to the constraint
that the plant is not closed. In the event of a
strike or lockout, we assume that both sides
receive zero income. This assumption is less
conventional for workers than for firms. In
particular, zero income during conflict impli-
es (a) that workers remain unemployed
during labor disputes and (b) that striking
workers do not receive strike support from
non-striking workers. In other words, wor-
kers who receive strike benefits are assumed
to be drawing on their own collective
savings.
According standard bargaining the-
ory, the outcome of local negotiations under
the specified assumptions is a wage that is a
fraction, say alpha where O≤CC≤1, of the
plant's revenues per worker, provided the
fraction of the plant's revenues exceeds wor-
kers' outside option. In any bargaining sys-
tem, workers must be offered at least as
much as they can earn elsewhere or firms will
be unable to fill vacancies. Workers' outside
option acts as a constraint on the bargaining
outcome in that employers cannot offer less
and still attract workers. Otherwise, the out-
side option has no impact on the outcome
(Sutton 1986). In Rubinstein's (1982) bar-
gaining model, workers' share, 0C, is determi-
ned by the relative impatience of the two
sides to settle during a conflict.
If the industry is small enough rela-
tive to the aggregate labor market such that
industry-level employment does not affect
workers' outside option, the distribution of
wages with decentralized bargaining can be
drawn as indicated in Figure 1. Let the value
of the outside option be indicated by the
wage r. Then, wages with decentralized bar-
gaining will be a share of the plants' revenues
as shown in the figure as long as that share
exceeds r, which occurs in plants that are
younger than the age sigma. Plants older