Decentralized Wage Bargaining Research Articles

The incidence and effects of decentralized wage bargaining in Finland

AbstractThere was a strong push from employers to decentralize wage setting in Finland in the early 2000s. We analyze the incidence of decentralization and its effect on the level and dispersion of wages by using nationally representative panel data. The results show that wage setting was more likely decentralized in collective agreements where a high share of employees worked in manufacturing or real estate industries than in other industries, such as in education and human health and social work activities. Decentralization was, for the most part, quite short-lived. Using recent difference-in-differences methods that allow for heterogeneous treatment effects and differences in the timing of treatment, we show that decentralization had modest positive effects on the level and dispersion of wages in manufacturing.

Firm‐specific pay premiums and the gender wage gap in Europe

AbstractWe study how firm premia influence the gender wage gap for 21 European countries. We use a quadrennial harmonized matched employer–employee dataset to estimate gender‐specific firm premia. Subsequently, we decompose the firm‐specific wage premia differential into within‐ and between‐firm components. On average, the former accounts mainly for the decline in the pay gap between 2002 and 2014. We pay particular attention to the development of each component by age group, and find that the between‐firm component is associated with an increase in the gender pay gap over age. The decomposition of firm premia allows us to investigate how institutional settings relate to each component. We associate the within‐firm component with collective bargaining at the national and firm levels, and the between‐firm component with family policies. Decentralized wage bargaining is associated with a larger within‐firm pay gap, whereas family policies incentivizing women to return to employment after family formation are linked to a smaller between‐firm component.

Shocks and labour cost adjustment: evidence from a survey of European firms*

AbstractWe use firm-level survey data from 25 EU countries to analyse how firms adjusted their labour costs (employment, wages, and hours) in response to shocks in the years 2008–13. We find that the pattern of adjustment is not much affected by the type of the shock, but differs according to the direction of the shock (positive or negative), its size, and persistence. In 2010–13, firms responding to negative shocks were most likely to reduce employment, then hourly wages, and then hours worked. Results for the 2008–9 period indicate that the ranking might change during deep recessions as the likelihood of wage cuts increases. In response to positive shocks in 2010–13, firms were more likely to increase wages, followed by increases in employment, and then hours worked. Finally, we found that employment and hours cuts are less likely following negative shocks in countries with decentralized wage bargaining.

Does Less Wage Compression Lead to Less Training in Germany? An Expansion of Acemoglu and Pischke's Model of Training in Imperfect Labor Markets

We expand Acemoglu and Pischke's seminal model of training in imperfect labor markets by including the system of collective wage bargaining and the components of firms' training costs. Thus we can adapt their model to institutional changes that occurred since the 1990s. The model and the empirical developments we present show that firms compensate lower returns of apprenticeship training by changing training procedures towards more training at the work place and thus by decreasing net training costs. Therefore, more decentralized wage bargaining does not result in a reduction of firms' supply of training positions.

Changes in the Economic Returns to Attending Prestigious Institutions in Norway

ABSTRACTThe purpose of this paper is to explore whether the returns to attending a prestigious higher education institution have increased in Norway for students who graduated in 1975 to students who graduated in 1999. A handful of published studies find that the returns to attending prestigious institutions have increased in the last decades. However, they all study the USA, which has a decentralized wage bargaining system. The results in this paper shed light on whether a centralized wage bargaining system, typical for many west-European countries, prevents the returns to attending prestigious institutions from increasing. I find that attending prestigious institutions pays off economically in Norway and that the returns have increased throughout the investigated period. Another aim of this paper is to investigate whether the returns have increased more at the top of the earnings distribution than at the bottom. I find that the returns are highest at the top of the earnings distribution and have increased the most at the top. At the 90th quantile, for instance, students who attended a prestigious business school between 1975 and 1979 obtained 80% higher earnings than students attending nonprestigious institutions in the same period. Among students who graduate 20 years later, this difference is 139%.

Collective versus Decentralized Wage Bargaining and the Efficient Allocation of Resources

An advantage of collective wage agreement is that search and business-stealing externalities can be internalized. A disadvantage is that it takes more time before an optimal allocation is reached because more productive firms (for a particular worker type) can no longer signal this by posting higher wages. Specifically, we consider a search model with two sided heterogeneity and on-the-job search. We compare the most favorable case of a collective wage agreement (i.e. the wage that a planner would choose under the constraint that all firms in a sector-occupation cell must offer the same wage) with the case without collective wage agreement. We find that collective wage agreements are never desirable if firms can commit ex ante to a wage and only desirable if firms cannot commit and the relative efficiency of on the job search to off- the job search is less than 20%. This result is hardly sensitive to the bargaining power of workers. Empirically we find both for the Netherlands and the US that this value is closer to 50%.

Decentralized union-oligopoly bargaining when wages signal strength

This paper analyzes decentralized wage bargaining in a unionized oligopoly industry. The novel features of the proposed model are that firms are subject to incomplete information concerning their cost and that wages may signal firms’ private information. The potential for signaling exerts an upward shift on the equilibrium wage profile which mitigates the externality that has been shown to weaken unions’ bargaining power in decentralized wage bargaining.

Product market integration and wage bargaining institutions

This paper studies the effects of product market integration on wage bargaining institutions. By considering an international Cournot–Nash oligopoly with unionised home firms and non-unionised foreign firms producing substitute goods, the paper shows that the relative size of the home and foreign markets matters for the effects of a bilateral reduction in trade barriers. If the home market size is relatively larger than the foreign market size, a reduction in trade barriers, by lowering the sharable surplus for home firms and unions in the global market, gives unions incentives to choose more decentralised wage bargaining institutions. This industry-level mechanism, however, works in the opposite direction when the foreign market size is sufficiently large, including the “reciprocal dumping” symmetric market size model. In this case, cutting trade barriers raises the global sharable surplus and encourages domestic wage-setters to choose more centralised institutions.

Collective versus decentralized wage bargaining and the efficient allocation of resources

In a search model with two sided heterogeneity and on-the-job search, we compare collective bargaining agreements (CBA) with a decentralized bargaining outcome case. Under CBA, a union chooses a pay-scale schedule and the firm can select a wage from this pay scale after observing match quality. An advantage of collective bargaining agreements is that search and business-stealing externalities can be internalized. A disadvantage is that it takes more time before an optimal allocation is reached. What the most desirable system is, depends on worker bargaining power (β) and the relative efficiency of on- versus off- the job search. We find both for the Netherlands and the US that as long as β lies between 0.1 and 0.7, CBA is less desirable.

Monetary-Fiscal Wage Interactions in a Multi-Country Currency Union

This paper studies a multi-country currency union of small open economies. Demand-side disturbances hamper monetary union stabilisation unless participating countries’ business cycles are perfectly synchronised. In the face of country-specific supply shocks, a currency union of small open economies underperforms monetary autonomy. Higher preference for price stability also deteriorates monetary union stabilisation performance. Monetary-fiscal interaction leads to a free rider problem, with supply shocks eliciting higher interest rate variability. Wage bargaining attempting at stabilising real wages and output mitigates the free rider problem. Decentralised wage bargaining and a lower wage sensitivity of output favour a currency union over monetary autonomy.

Increased sorting and wage inequality in the Czech Republic

AbstractThis paper makes use of a linked employer–employee dataset to examine the evolution of wage inequality in the Czech Republic during 1998–2006. We find evidence of slightly increasing returns to human capital and diminishing gender inequality and document sharp increases in both within‐firm and between‐firm inequality. We investigate several hypotheses to explain these patterns: increased domestic and international competition, decentralized wage bargaining, skill‐biased technological change and a changing educational composition of the workforce. Domestic competition is found to lower within‐firm inequality whereas we find no evidence that increased international trade at the industry level is associated with higher between‐ or within‐firm wage inequality. The key factors driving the observed increase in wage inequality are increased educational sorting and the inflow of foreign firms to the Czech Republic.

Collective versus Decentralized Wage Bargaining and the Efficient Allocation of Resources

An advantage of collective wage agreement is that search and business-stealing externalities can be internalized. A disadvantage is that it takes more time before an optimal allocation is reached because more productive firms (for a particular worker type) can no longer signal this by posting higher wages. Specifically, we consider a search model with two sided heterogeneity and on-the-job search. We compare the most favorable case of a collective wage agreement (i.e. the wage that a planner would choose under the constraint that all firms in a sector-occupation cell must offer the same wage) with the case without collective wage agreement. We find that collective wage agreements are never desirable if firms can commit ex ante to a wage and only desirable if firms cannot commit and the relative efficiency of on the job search to off the job search is less than 20%. This result is hardly sensitive to the bargaining power of workers. Empirically we find both for the Netherlands and the US that this value is closer to 50%.

A NOTE ON PRODUCT DIFFERENTIATION IN A LINEAR CITY AND WAGE BARGAINING

ABSTRACTEconomides (Economics Letters, 1986, 21, pp. 67–71) has shown that within a linear city an equilibrium exists in a two‐stage location–price game when the curvature of the transportation cost function is sufficiently high. One important point is that not all of these equilibria are at maximal differentiation. In this paper, we include an additional stage with decentralized wage bargaining. This intensifies price competition resulting in locations that are nearer to the extremes of the city. The magnitude of this effect depends on the bargaining power of the unions. Contrary to the model with exogenously given costs, if unions are sufficient strong all price equilibria in pure strategies are at maximal differentiation. With a low parameter for the curvature of the transportation cost function unions can improve the location decision from a social viewpoint.

Fighting Tax Competition in the Presence of Unemployment: Complete versus Partial Tax Coordination

Fighting Tax Competition in the Presence of Unemployment: Complete versus Partial Tax Coordination, 10.1628/001522108X312069, Jahrgang 64 (2008) / Heft 1, 0015-2218 (1614-0974), Public Finance Analysis

The Queensland Dental Assistants' Equal Remuneration Case: Advancing Gender Pay Equity at State Level?

ABSTRACT One of the concerns for the pursuit of gender pay equity in Australia, following the implementation ofWorkChoices in March 2006 and the commitment by both major political parties to a ‘unified’ national system of private-sector industrial relations, is loss of the momentum recently achieved through the development and application of state-level Equal Remuneration Principles. In this article we use the Dental Assistants’ Equal Remuneration case, heard before the Queensland Industrial Relations Commission in 2005, to examine the efficacy of this type of approach, based on the use of an Equal Remuneration Principle, in identifying gender-based undervaluation and translating findings of inequity into wage increases. The case illustrates a capacity to address structural gender-bias in the wages system in a way that would be inconsistent with a model such as WorkChoices, which prioritises decentralised wage bargaining and rejects broad notions of comparative wage justice. It also illustrates a developing capacity to engage with the difficult processes of assessing and redressing gender-bias in the valuation of ‘women's’ work. Although there is much still to be achieved in this area, sidelining emerging expertise and experience under a nationally based system can only impede the pursuit of gender pay equity.

A Note on Franchising and Wage Bargaining

A franchising contract relocates distributable rent between franchisor and franchisee. With decentralized wage bargaining relocation modifies the position of the union in the wage bargaining. If the rent is relocated to the franchisor completely, then even a strong union is not able to raise wage above reservation level in the franchisee's firm. If franchisor and franchisee negotiate on rent division, there is an incentive to increase the franchise fee at the expense of the union. Therefore the overall rent assigned to labor depends on the differences of labor intensity in the franchisor's and franchisee's firms. Firm owners may be able to transfer distributable rents from a firm with a strong union to one with a weak union. Furthermore, a franchising contract shows a first mover advantage. A franchising contract is placed before wage bargaining, benefiting the franchisor.

Wage Indexation and Monetary Policy

This paper analyzes the effect of indexed wage contracts on inflation and social welfare in a Barro--Gordon model with state-contingent monetary policy. Wage indexation reduces the inflation bias but may raise the variance of inflation rates. In social optimum, wages are fully indexed to the price level, but this requires optimal wage adjustments to productivity shocks. If wage adjustments to productivity are suboptimal, the second-best solution calls for nonindexed wage contracts and a central banker with balanced aspiration levels of employment and real wages. In the case of decentralized wage bargaining, a prohibition of wage indexation may improve welfare.

The gender earnings gap: effects of institutions and firms--a comparative study of French and Australian private firms

This paper uses two employer-employee linked data sets to investigate the interactive role of labour market institutions and firm wage policies on the gender earnings gap. Extending the Juhn et al . (1991) decomposition methodology, a new decomposition methodology is proposed to investigate the role of firm wage policies on the gender earnings gap. Two countries with different wage bargaining systems, Australia and France, are used to conduct a comparative study. It is found that firm wage policies in Australia play a much larger role in narrowing the gender earnings gaps than in France. This is mainly due to the fact that Australia has a more decentralised wage bargaining system and that such system is operated under an environment where there is a strong union presence.

Gender Earnings and Part‐Time Pay in Australia, 1990–1998

AbstractThis paper studies the effects of enterprise bargaining on the pay position of women and other target equity groups. Contrary to a priori expectations the paper shows a convergence in full‐time and part‐time gross gender pay gaps following the adoption of decentralized wage bargaining. Convergence in the latter reflects compositional (human capital) effects: the entry of less qualified and less experienced males into part‐time employment. Overall the results show a deterioration in the pay position of men employed full‐time relative to women and part‐timers (men and women) brought about by slower wage growth amongst men in full‐time employment.

Industry-Level Wage Bargaining: A Partial Rehabilitation - The German Experience

In order to reduce unemployment, it is often recommended that industry-levelwage bargaining in Germany should be replaced by a more decentralized system.This paper provides a critical assessment of the current wage bargaininginstitutions and reexamines the case for a more decentralized system. Based ona theoretical model integrating Insider-Outsider aspects into the comparison, the uniform superior employment performance of a decentralized wage bargaining system is questioned. We conclude that, rather than solely trying to decentralize wage bargaining, a promising policy option may be to improve the skills of the unemployed by efficient labour market policies and to foster institutional reforms such that wage bargaining takes account of the long-run employment consequences of wage setting.