Habit formation and trade unions.

The article investigates how habit formation influences collective bargaining outcomes when a firm-specific trade union sets wages. It demonstrates that internal reference points based on past wages lead the union to increase wages over time, particularly if habit concerns of employed members outweigh those of unemployed members, resulting in a decline in employment. The analysis, conducted primarily in a two-period model and extended to longer horizons and growing economies, shows that policy changes—such as variations in unemployment benefits or product prices—can have prolonged effects on wage setting due to their impact on the habit stock. The findings hold under various preference specifications and bargaining frameworks, including Nash bargaining, and suggest that habit formation can explain persistent wage increases despite deteriorating economic conditions.