Abstract
Abstract In a standard Diamond-Mortensen-Pissarides labour market with frictions, the authors seek to determine when there is more employment with individual wage bargaining than with collective wage bargaining, using a wage equation generated by the standard total surplus sharing rule. Using a Cobb-Douglas production function, they find that if the bargaining power of the individual is high compared to the bargaining power of the union, there is more unemployment with individual wage setting and vice versa. When the individual worker and the union have the same bargaining power, if the cost of opening a vacancy is sufficiently high, there is more unemployment with individual wage setting. Finally, for a constant marginal product of labour production function AL, when the individual worker and the union have the same bargaining power, individual bargaining produces more unemployment.
Highlights
Compared to Anglo-Saxon countries, European labour markets are generally characterized by higher unemployment, more stringent employment protection legislation, more tightly regulated legislation and a large proportion of wages decided by collective agreements
This large increase in the unemployment rate has led to a renewed emphasis on the need to carry out structural labour market reforms, in the Mediterranean countries, as the key to boosting employment, productivity and GDP growth.1. Most of these structural reforms call for deregulation in employment protection legislation and an acceleration of the decentralization of collective bargaining leaving much more room for firm-level bargaining on wages. Support for these policy recommendations can be found in a large body of literature that points to the institutional aspects of the labour market, such as employment protection legislation, unemployment benefits and the wage bargaining system, as the source of the observed high unemployment rate
Our main findings, using a Cobb-Douglas production function F(L) = ALα, where α < 1, are that with individual wage setting, wages are set proportional to the marginal product of labour, while with collective wage setting they are set proportional to the average product of labour
Summary
Compared to Anglo-Saxon countries (i.e. the US and the UK), European labour markets are generally characterized by higher unemployment, more stringent employment protection legislation, more tightly regulated legislation and a large proportion of wages decided by collective agreements. This large increase in the unemployment rate has led to a renewed emphasis on the need to carry out structural labour market reforms, in the Mediterranean countries, as the key to boosting employment, productivity and GDP growth.1 Most of these structural reforms call for deregulation in employment protection legislation and an acceleration of the decentralization of collective bargaining leaving much more room for firm-level bargaining on wages. The objective of this paper is to analyze which bargaining system -individual or collective- generates more unemployment, in a Diamond, Mortensen and Pissarides (DMP) labour market using a wage equation derived from the usual surplus-sharing rule in both systems.
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