Collective wage setting when wages are generally binding An antitrust perspective

Abstract

This paper explores the anticompetitive product market effects that wage agreements between employers’ associations and labor unions can have when wages are generally binding. In particular, it is shown that both employers’ associations and unions may have a common interest in increasing the standard wage rate if coverage extension rules can be used to raise rivals’ costs. This may help to explain why both employers’ associations and labor unions appear to oppose the removal of the coverage extension rule provided for in Germany’s labor law, the so-called Allgemeinverbindlicherklärung (AVE). Consequently, the paper argues that coverage extension rules should be a subject matter of antitrust policy, not only for their labor market implications, but also for their effects on product markets. The paper also shows, however; that there are constellations where unions actually prefer a wage rate below the entry deterring limit wage. In these cases, a strong labor union can serve as an efficiency enhancing countervailing power to employers’ associations.