Centralized Wage Setting Research Articles

On the Social Desirability of Centralized Wage Setting when Firms are Run by Biased Managers

Abstract This paper compares the welfare outcomes obtained under alternative unionization regimes (decentralized vs. centralized wage setting) in a duopoly market in which shareholders delegate strategic decisions to biased (overconfident or underconfident) managers. In such a framework, the common tenet that consumer surplus and overall welfare are always higher under decentralized wage setting is completely overturned. Indeed, in the presence of centralized unionization (industry-wide union), firm shareholders always prefer to hire more aggressive or less conservative managers and, as a result, output (consumer surplus) and overall welfare are larger than in a decentralized wage setting structure.

International outsourcing and trade union (de-)centralisation

We study the effects of centralised versus decentralised wage setting in a unionsed duopoly where firms can outsource parts of input production to foreign subcontractors. We show that decentralised (as opposed to centralised) wage setting allows trade unions to capture a larger share of the rents generated by international outsourcing. Consequently, the equilibrium degree of outsourcing is lower under decentralised wage setting, which benefits unions if they are sufficiently employment oriented. We identify situations in which both firms and unions prefer decentralised over centralised wage setting. Thus, international outsourcing opportunities is a potential driver of trade union decentralisation.

The Role of (De-)Centralized Wage Setting for Industry Dynamics and Economic Growth: An Agent-Based Analysis with the Eurace@Unibi Model

In this paper, we employ the agent-based macroeconomic Eurace@Unibi model to study the economic implications of different degrees of de-centralization in the wage setting. We think of de-centralization as wages being a weighted average of an economy-wide ‘union wage’ and a firm-specific component depending on the firm’s productivity and the experienced tightness of the labor market. Starting from a baseline scenario, corresponding to a high degree of unionization, in which wages are fully centralized and indexed on economy-wide productivity gains and inflation, we investigate how an increasing level of de-centralization affects the dynamics of output, employment, inequality, and market concentration. Our findings suggest that stronger centralization of the wage-setting process induces lower wage inequality and stronger concentration on the consumption goods market. Furthermore, due to more physical investments, an economy with more centralized wage setting is characterized by higher productivity and faster economic growth.

Current Accounts and Coordination of Wage Bargaining

This study provides novel evidence on the impact of labor market institutions on current account dynamics. Our results suggest that a high degree of coordination of wage bargaining has a positive effect on the current account balance over the long run. This result is not driven entirely by wage moderation induced by centralized wage setting. We also provide robust evidence that a high degree of coordination of wage bargaining is associated with a slower current account adjustment toward its long-run equilibrium. This result seems theoretically plausible; the aggregate shocks in the exporting sector are largely driven by idiosyncratic shocks and the presence of idiosyncratic shocks increases the importance of labor market flexibility. Overall, our analysis of the impact of labor market institutions on current account dynamics complements the existing empirical current account literature focused on macroeconomic and financial measures.

Employee share ownership in a unionised duopoly

Profit sharing schemes have been analysed assuming Cournot competition and decentralised wage negotiations, and it has been found that firms share profits in equilibrium. This paper analyses a different remuneration system: employee share ownership. We find that whether firms choose to share ownership or not depends on both the type of competition in the product market and the way in which workers organise to negotiate wages. If wage setting is decentralised, under duopolistic Cournot competition both firms share ownership. If wage setting is centralised, only one firm shares ownership if the degree to which goods are substitutes takes an intermediate value; otherwise, the two firms share ownership. In this case, if the union sets the same wage for all workers neither firm shares ownership. Therefore, centralised wage setting discourages share ownership. Finally, under Bertrand competition neither firm shares ownership regardless of how workers are organised to negotiate wages.

Wage Rigidity, Inflation, and Institutions

AbstractWe study the possible existence of downward nominal wage rigidity (DNWR) at wage growth rates different from zero in aggregate data. Even if DNWR prevails at zero for individual workers, compositional effects might lead to falling aggregate wages, while changes in relative wages combined with DNWR might lead to positive aggregate wage growth. We explore industry data for 19 OECD countries, over the 1971–2006 period. We find evidence for a floor on nominal wage growth at 6 percent in the 1970s and 1980s, at 1 percent in the 1990s, and at 0.5 percent in the 2000s. Furthermore, we find that DNWR is stronger in country‐years with strict employment protection legislation, high union density, centralized wage setting, and high inflation.

Centralized Wage Setting and Active Labor Market Policies in Frictional Labor Markets: The Nordic Case

We adopt a standard search and matching model with endogenous job destruction to investigate two issues. First, we use a simplified version of Boeri-Burda to show that at sufficiently low levels of wage share, centralized wage bargaining performs better than decentralized bargaining in terms of average productivity, unemployment, and income inequality. Second, we incorporate active labor market policies in the model and establish that they are more effective in reducing unemployment when wage setting is centralized. Finally, numerical analysis suggests that the difference in effectiveness is sizeable.

Teacher Mobility: Can Financial Incentives Help Disadvantaged Schools to Retain Their Teachers?

This paper studies teacher mobility in France using unique matched teacher-school data. All tenured teachers in lower secondary schools are included in the analysis. Some institutional features of the French educational system are particularly interesting for analyzing the effect of non-pecuniary factors on mobility decisions: completely centralized wage setting; explicit and centralized mobility rule setting; a career-based system where teachers are civil servants and rarely quit. Moreover, a specific program, implemented in September 1990, awards bonuses to teachers in some disadvantaged areas (Zones d'Education Prioritaire). Together, these give us the opportunity to assess the impact of this type of financial incentives. We find that teachers tend to switch schools when they work in establishments with a high proportion of less able students, students from minority groups and/or students from economically disadvantaged backgrounds. In addition, teachers who do not work in the region where they were born are more likely to move. Finally, regarding pecuniary factors, it appears that the incentives driven by bonuses are not sufficient to retain teachers in ZEP schools.

Union Wage Setting and International Trade

This paper sets up a general oligopolistic equilibrium model with two countries that differ in the centralization of union wage setting. Being interested in the consequences of openness, we show that, in the short-run, trade increases welfare and employment in both locations, and it raises income of capital owners as well as workers. In the long run, capital outflows from the country with the more centralized wage setting generate winners and losers and make the two countries more dissimilar in terms of unemployment of welfare. Decentralization of wage setting can successfully prevent capital outflow and the export of jobs.

Teacher Mobility Responses to Wage Changes: Evidence from a Quasi-Natural Experiment

This paper utilizes a Norwegian experiment with exogenous wage changes to study teachers' turnover decisions. Within a completely centralized wage setting system, teachers in schools with a high degree of teacher vacancies in the past got a wage premium of about 10 percent during the period 1993–94 to 2002–03. The empirical strategy exploits that several schools switched status during the empirical period. In a fixed effects framework, I find that the wage premium reduces the probability of voluntary quits by six percentage points, which implies a short run labor supply elasticity of about 1¼.

Union membership and employment dynamics: A note

We show that the well-known result that static union models overstate distortions caused by unionism only holds in the special case of firm-level wage setting. With centralized wage setting, however, it rather depends on both the elasticity of labor demand and union's time preference rate whether static models overrate or even underrate unions' distortions.

Labor Markets in CIS Countries

This work is done as contribution to the Regional Human Development Report 2004 section 3.7 on “Labor Markets”. The paper focuses on discussing peculiarities of the labor market transition in CIS countries, features of unemployment, labor legislation, and role of the trade unions.The paper gathers information on the labor markets of CIS and Eastern European countries that was available by summer 2004, and draws policy recommendations based on comparison between these two groups of countries. The main conclusion is that the transformation of labor markets is not complete in any of the CIS countries; most of the problems that prevailed in the early 1990s remain. These include: centralized wage setting in five CIS countries - Belarus, Moldova, Tajikistan, Turkmenistan, and Uzbekistan; extensive unemployment and underemployment, much of which is hidden; ineffective systems of labor relations and social protection; large mismatches between the labor market skills supplied and the skills demanded by new market economies; inadequate official labor market data. Fortunately, the strong economic growth experienced by most CIS countries since 1999 has increased the demand for labor and is putting downward pressures on unemployment rates. This offers a window of opportunity for policy makers seeking to further transform labor markets, and to modernize labor relations and social protection systems. The above analysis suggests the policy recommendations to speed up further transformation.

Understanding Sectoral Differences in Downward Real Wage Rigidity: Workforce Composition, Institutions, Technology and Competition

This paper examines whether differences in wage rigidity across sectors can be explained by differences in workforce composition, competition, technology and wage bargaining institutions. We adopt the measure of downward real wage rigidity (DRWR) developed by Dickens and Goette (2006) and rely on a large administrative matched employer-employee data set for Belgium over the period 1990-2002. Firstly, our results indicate that DRWR is significantly higher for white-collar workers and lower for older workers and for workers with higher earnings and bonuses. Secondly, beyond labor force composition effects, sectoral differences in DRWR are related to competition, firm size, technology and wage bargaining institutions. We find that wages are more rigid in more competitive sectors, in labor-intensive sectors, and in sectors with predominant centralized wage setting at the sector level as opposed to firm-level wage agreements.

Wage Rigidity, Institutions, and Inflation

A number of recent studies have documented extensive downward nominal wage rigidity (dnwr) for job stayers in many oecd countries. However, dnwr for individual workers may induce downward rigidity or “a floor” for the aggregate wage growth at positive or negative levels. Aggregate wage growth may be below zero because of compositional eects, for example that old, high-wage workers are replaced by young low-wage workers. dnwr may also lead to a positive growth in aggregate wages because of changes in relative wages. We explore industry data for 19 oecd countries, over the period 1971‐2006. We find evidence for floors on nominal wage growth at 6 percent and lower in the 1970s and 1980s, at one percent in the 1990s, and at 0.5 percent in the 2000s. Furthermore, we find that dnwr is stronger in country-years with strict employment protection legislation, high union density, centralised wage setting and high inflation.

Environmental Taxes and Wage Setting Structure

The literature on the environment shows that imperfect competition in global markets creates a strategic interaction between governments that can lead to the ineficient distortion of environmental taxes. This literature does not consider that workers can set up different organizational structures to set wages. We assume that under decentralized wage setting there is an independent union in each irm while under centralized wage setting there is an industry-wide union that sets the wages of all irms. We show that under a decentralized structure governments choose environmental taxes closer to those which are socially eficient than those chosen under a centralized structure. However, environmental damage is greater in the former case.

Openness, centralized wage bargaining, and inflation

This paper develops a model of an open economy containing both sectors in which wages are market-determined and sectors with wage-setting arrangements. A portion of the latter group of sectors coordinate their wages, taking into account that their collective actions influence the equilibrium inflation outcome in an environment in which the central bank engages in discretionary monetary policymaking. Key predictions forthcoming from this model are (1) increased centralization of wage setting initially causes inflation to increase at low degrees of wage centralization but then, as wage centralization increases, results in an inflation drop-off; (2) a greater degree of centralized wage setting reduces the inflation-restraining effect of greater central bank independence; and (3) increased openness is more likely to reduce inflation in nations with less centralized wage bargaining. Analysis of data for seventeen nations for the period 1970–1999 provides generally robust empirical support for all three of these predictions.

TAXATION AND CENTRALISED WAGE SETTING: THE CASE OF ENDOGENOUS LABOUR SUPPLY

AbstractThe implications of centralised wage setting for the relationship between taxation, wages and employment are studied allowing for endogenous adjustment in work hours. We show that centralisation promotes wage moderation, makes wages and employment less sensitive to changes in wage taxation and reduces the hours worked. With an individual supply of working hours, a wage tax can even improve employment if wage setting is centralised and marginal utility from a public good is sufficiently high. Moreover, if a profit tax is used to finance public expenditure, higher tax reduces wages and improves employment.

Trade and inequality in wages and unemployment

Increased globalization has shifted demand towards skilled labor at the expense of unskilled labor in developed countries. Increased skill mismatch calls for flexible wages and widened wage dispersion. Using a large macroeconometric model with heterogeneous labor, we show that the downward pressure on import prices has increased skill mismatch and–somewhat surprisingly–decreased wage differentials in Norway. The reason is that while the relatively unchanged macroeconomic consequences of this development is the primary focus in centralized wage setting among blue-collar workers, the reduced cost of living plays a more important role in more decentralized negotiations among white-collar workers.

Teacher turnover and non-pecuniary factors

This paper studies teacher mobility using matched employee–employer panel data from Norwegian primary and lower secondary schools. The Norwegian institutional setup with completely centralized wage setting for teachers is ideal to analyze the effect of non-pecuniary job attributes on quit decisions. We find that teachers tend to leave schools with high share of minority students and high share of students with special needs. In addition, the composition of teachers and the school size affect the propensity to quit. These results are robust across different econometric specifications and sub-samples.

Unionization Structure, Licensing and Innovation

Taking technological differences between firms as given, we show that the technologically advanced firm has a stronger incentive for technology licensing under a decentralized unionization structure than with centralized wage setting. Furthermore, We show that, in presence of licensing, the incentive for innovation may also be stronger under decentralized unions. Unions have a clear preference for centralization only if productivity improvements are relatively small.