Wage and employment effects of a wage norm

Abstract

This paper analyses how a firm-level tax or subsidy on deviations from a pre-set wage norm may promote employment. This fiscal instrument affects the perception of the labour demand by the workers’ union. The positive employment effect appears both in an efficient bargaining model and in a monopoly union model. For a given reservation wage, the perception effect is the strongest when the norm is close to the wage level which would have been chosen in the absence of the tax. Most transition countries used tax-supported wage norms in the early 1990’s at the beginning of the transition, as a part of their market liberalization programs. We can test the effect of the norm on the wages on a sample of 43 Polish firms in 1990 and 1991. The data support the central role of the wage norm in our model, and suggest that the policy indeed could have a positive employment effect.