WAGES AND EMPLOYMENT IN A REPEATED GAME WITH REVENUE FLUCTUATIONS

Empirical investigations suggests that the real wage is surprisingly f lat over the business cycle. This paper analyses a repeated game betwe en a union and a firm which can contribute to explaining the flat wage . The parties cannot enter binding contracts, and revenue is fluctuati ng. The paper focuses on the best subgame-perfect equilibrium among th ose sharing the expected surplus in given fixed shares - e.g. equal sh ares. It is shown that (for moderate discount factors) this equilibriu m has a more counter-cyclical wage, than what would be the case if the parties shared the surplus in each period in the same shares.