Heterogeneous Labor in a Model of Wage Bargaining

Abstract

Despite its alleged importance for skill specific labor market trends in West Germany, explicit empirical modelling of union wage bargaining has rarely taken place (the comprehensive recent survey on unions and unemployment from a German perspective in Jaeger, 1996, does not even mention this issue). In the Phillips-Curve or the Wage-Curve tradition, there have been some attempts to proxy the outcome of wage bargaining by postulating separate wage setting relations for the different skill types of labor depending upon group specific unemployment rates (see Nickell and Bell, 1995, and Beisinger and Moller, 1998). This chapter tries to go further in the empirical modelling of wage bargaining by developing an empirically operational structural model of wage bargaining and employment determination in West Germany which can be put directly to the data. Wage bargaining is assumed to set average wages and wage dispersion for each of the two different skill groups (U = low-skilled“unskilled”) and (M = medium-skilled). Management at the firm level has free discretion to decide on employment. This“right-to-manage” assumption corresponds to the prima facie view of wage setting in West Germany: Wage bargaining occurs at the sectoral level between trade unions and employers’ associations such that it appears impossible to implement efficient contracts imposing wages and employment at the firm level (see Franz, 1996, chapter 8, and Jaeger, 1996).