Wage Bargaining, Hard Money and Economic Performance: Theory and Evidence for Organized Market Economies

Abstract

The political and economic couplings between wage bargaining institutions and macro-economic policy regimes are explored in this article. It is argued that in advanced industrialized democracies with well-organized unions and employers' associations, macro-economic performance (especially unemployment) is the outcome of an interaction between the centralization of the wage bargaining system and the monetary policy regime. Thus, a decentralized bargaining system in which the government in credibly committed to a non-accommodating monetary policy rule poses an institutional alternative to a centralized mode of wage regulation where the government enjoys macro-economic policy flexibility. Based on time-series data from ten highly organized market economies, I show that both of these institutional ‘equilibria’ produce superior employment performance, but also that the two systems are associated with very different distributional outcomes, and that they are supported by different coalitions of organized interests. In addition to predicting economic outcomes, the proposed model provides a theoretical framework for analysing institutional change in wage bargaining systems and in macro-economic policy regimes.