Unemployment and Nash Bargaining
A 2006 academic paper published by the National Bureau of Economic Research suggests that the unsteadiness of unemployment in the United States can be explained through Nash Bargaining. The basic premise of the article is that the repeated Nash Bargaining of wages between firms and workers brings about a volatility in the employment market. This recurring movement of wages not only creates an obscure job market, but also moderates a firms incentive to hire and a workers incentive to look for new jobs. Thus, the spiraling Nash Bargaining between firms and workers leads to a flagging employment market in the United States and an ultimately burdened Gross Domestic Product. Another consequence of this bargaining is a spillover effect that leads to wage “stickiness.” It is interesting to relate how erratic unemployment is to the rigidity of wage that is caused by it, however counter-intuitive that may sound.
In class we learned that if there are two nodes connected by an edge of a value of say, $1, then the two nodes would split the value evenly at $0.50. However, once outside options come into the picture, the situation is changed. These outside options might put some nodes in positions of power and might render others powerless. Nodes in positions of power might threaten other nodes with their outside options. Other powerless nodes might have no choice but take whatever value they can from a deal since they have no other outside options. This system is applicable to the employment market as well. Some firms might be in positions of power and might threaten workers who have no other outside options into working for less than the value they deserve. Likewise, some workers believe they are in positions of power and bargain with multiple firms to see which one offers them the best value. This recurring bargaining is what creates the volatile nature of the job market today. What catalyzes this cyclical bargaining is the ambiguity of the job market. Potential employers don’t know what employees will apply for a job and potential employees don’t know who will hire them. This results in firms and workers irrationally bargaining with only the options they see, while unmindful of the other unknown options present. This is different from what we see in class because we are usually given a problem in which a node knows all the outside options and can thus act accordingly.
After reading this paper, I was reminded of Obama’s recent unemployment proposal. What Obama proposed was more money to the unemployed in the form of tax credit and increased/longer unemployment benefits. This paper has led me to think that these changes might help in the short term, but wouldn’t really help the unemployment problem in the long run. What would help the unemployed find a job would be a method of clearing out the opacity of the job market and allowing workers to evaluate their options. Give a man a fish and feed him for a day; show a man his options and give him a job for a lifetime.
http://www.nber.org/papers/w12498