CENTRALIZED WAGE SETTING, WAGE DRIFT AND STABILIZATION POLICIES UNDER TRADE UNIONISM

Abstract

THE LAST years have witnessed a remarkable growth in the number of studies on the economics of trade unions.1 One important branch of this field explores the consequences of a monopoly union, i.e., a union that is sufficiently strong to control the rate. The union utility function typically includes the real and the level of employment as arguments and the union sets the rate in order to maximize this objective function, taking the aggregate labour demand schedule as given. The monopoly union approach appears to capture significant aspects of setting in countries with strong unions, a small non-union sector and centralized setting (e.g., the Scandinavian countries). However, there are a number of well-known objections to this model, including its lack of explicit treatment of the bargaining process and its failure to produce a Pareto-efficient outcome for the parties involved in the negotiations. An additional questionable element of the model is the strict monopoly assumption itself; wages are determined only through centralized union setting with no explicit role for firms, market forces, or local negotiations. A large part of increases in countries with nation-wide or industrywide settlements not been the direct consequences of central negotiations. Rather, it shows up as wage drift, i.e., increases in addition to the changes agreed upon in central negotiations. An early analysis by Phelps Brown (1962) notes (p. 339) that drift has been conspicuous in the democracies with predominantly industry-wide settlements-in Scandinavia, the Netherlands, the United Kingdom, and Australia. Several empirical studies show a marked covariation between drift