CHAIR OF

PUBLIC ECONOMICS

The Kalai-Smorodinsky-Solution for the modeling of wage negotiations: theoretical and experimental examinations

Prof. Dr. Andreas Knabe

Trade unions play an important role in most European countries in terms of wage determination and working conditions. For the economic analysis of such collectively acting labor market actors, it is necessary to describe the behavior of trade unions in theoretical models. In theoretical labor economics, wage negotiations are generally modeled by using the Nash bargaining solution. However experimental studies have led to doubts about the empirical relevance of this bargaining solution.

In the first part of this research project, we examine the consequences of using the alternative Kalai-Smorodinsky solution in comparison to the Nash solution in typical theoretical labor market models. The Kalai-Smorodinsky solution is integrated in models of general equilibrium with imperfect competition as well as in search and match models of the labor market and are examined on their influence regarding the equilibrium unemployment rate and the possibility to influence this rate by using political instruments. First results show that choosing the bargaining solution may have a critical effect on the evaluation of the outcome of labor market policy, for example concerning minimum wages.

In the second part of the project, these results are verified empirically and experimentally. The hypotheses derived from the theoretical models are examined experimentally. First results show that the Kalai-Smorodinsky solution is able to describe the wage negotiations in a more accurate way than the Nash solution.