Coordinated Wage Bargaining Research Articles

The effect of labor market institutions and macroeconomic variables on aggregate unemployment in 1990–2019: Evidence from 22 European countries

AbstractThis paper investigates the long-run effect of a wide set of labor market institutions (LMIs) and macroeconomic variables on aggregate unemployment for a panel of 22 European countries over the period 1990–2019. First-difference feasible generalized least squares model, Prais-Winsten regression with panel-corrected standard errors, two-step generalized method of moments estimation of the fixed effects, and fixed-effects regression with Driscoll and Kraay standard errors are estimated. The results suggest that employment protection legislation, wage bargaining coordination and centralization, minimum wage, and immigration inflows are significantly and negatively associated with the aggregate unemployment rate. Conversely, union density, product market regulation (PMR), and tax wedge have a positive and significant correlation with unemployment rate. The impact of corporate tax rate and government size is mostly positive. Moreover, the interaction between LMIs does matter and may sometimes change the interpretation of some reforms taken in isolation. Stronger wage-setting institutions may offset the negative impact of PMR and the tax wedge. Macroeconomic variables are generally consistent with the major literature and do not change LMIs interpretation. Among macroeconomic factors, capital accumulation plays the most important role in reducing the unemployment rate. Finally, my findings suggest the implementation of economic policies consistent with Keynesian theory and all those economists—such as Solow (1990)—who look at the labor market as a social institution.

Globalization, Work, and Health: A Nordic Perspective.

The Nordic countries are among the world’s leading countries in international rankings on prosperity, productivity, social equity, trust, and health. Such positive results may be linked to how these countries have organized their working life. The aim of this article is to describe core elements of the Nordic working life model (emphasizing Norway) and discuss how globalization may challenge the model, and thereby influence public health. Based on an extensive review of relevant research, we show that the Nordic working life model with a coordinated wage bargaining system between well-organized employers and employees results in productive enterprises, small wage differences, good working environments, and a high level of well-being. Global trends of liberalization of working life, increased labor migration, the platform economy, reduced unionization, and more precarious work challenge the Nordic working life model and its reliance on standard working contracts. Such a trend may result in increased inequity, reduced generalized trust, and poorer public health. Politicians and other stakeholders in the Nordic countries should cope appropriately with globalization and technological changes so that the Nordic countries will uphold their well-organized working life and good societal achievements.

The Holy Grail of Crypto Currencies: Ready to Replace Fiat Money?

:This article suggests that current forms of crypto currencies will fail to complement or replace fiat money. We show that fixed-supply coins like bitcoin suffer from an inherently speculative and deflationary design and are not backed by a “We Owe You”. Stablecoins, i.e. coins that rely on flexible supply designs, are also not backed by a “We Owe You” and cannot achieve price stability because they build on outdated monetarist theories. Moreover, the algorithmically planned allocation of new coins, which is characteristic of stablecoins, is not market-based. As such, it is inferior to contemporary ways of money creation. Regarding price stability, we suggest that (crypto) monetary policy needs to overcome the illusionary dichotomy between the real and the financial circuit by accounting for systematic coordinated wage bargaining mechanisms to reflect that firms set prices according to cost-based pricing rules.

The Origins of Persistent Current Account Imbalances in the Post-Bretton Woods Era

Why do some countries run persistent current account surpluses? Why do others run deficits, often over decades, leading to enduring global imbalances? Such persistent imbalances are the root cause of many financial crises and a major source of international economic conflict. We propose that differences in wage-bargaining institutions explain a large share of imbalances through their effect on the trade balance. In countries with coordinated wage bargaining, wage growth in export industries can be restrained to ensure competitiveness, leading to persistent trade surpluses. We estimate the contribution of these institutions to trade balances in Organisation for Economic Co-operation and Development (OECD) member countries since 1977 and find ample support for our hypothesis. Contrary to much of the literature, the choice of fixed or floating exchange rate regimes has only a small effect on trade or current account balances. In other words, internal adjustment in surplus countries via wage-bargaining institutions trumps external adjustment by deficit countries.

The Transition to the Knowledge Economy, Labor Market Institutions, and Income Inequality in Advanced Democracies

AbstractThe transition from Fordism to the knowledge economy in the world’s advanced democracies was underpinned by the revolution in information and communications technology (ict). The introduction and rapid diffusion ofictpushed up wages for college-educated workers with complementary skills and allowed top managers and CEOs to reap greater rewards for their own talents. Despite these common pressures, income inequality did not rise to the same extent everywhere; income in the Anglo-Saxon countries remains particularly unequally distributed. To shed new light on this puzzle, the authors carry out a panel data analysis of eighteenoecdcountries between 1970 and 2007. Their analysis stands apart from the existing empirical literature by taking a comparative perspective. The article examines the extent to which the relationship between the knowledge economy and income inequality is influenced by national labor market institutions. The authors find that the expansion of knowledge employment is positively associated with both the 90/10 wage ratio and the income share of the top 1 percent, but that these effects are mitigated by the presence of strong labor market institutions, such as coordinated wage bargaining, strict employment protection legislation, high union density, and high collective bargaining coverage. The authors provide robust evidence against the argument that industrial relations systems are no longer important safeguards of wage solidarity in the knowledge economy.

Shocks and Labour Cost Adjustment: Evidence from a Survey of European Firms

We use firm-level survey data from 25 EU countries to analyse how firms adjust their labour costs (employment, wages and hours) in response to shocks. We develop a theoretical model to understand how firms choose between different ways to adjust their labour costs. The basic intuition is that firms choose the cheapest way to adjust labour costs. Our empirical findings are in line with the theoretical model and show that the pattern of adjustment is not much affected by the type of the shock (demand shock, access-to-finance shock, ‘availability of supplies’ 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, regardless of the source of the shock. Results for the 2008-09 period indicate that the ranking might change during deep recession 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 suggesting an asymmetric reaction to positive and negative shocks. Finally, we show that strict employment protection legislation and high centralisation or coordination of wage bargaining make it less likely that firms reduce wages when facing negative shocks. JEL Classification: D21, D22, D24

Shocks and Labour Cost Adjustment: Evidence from a Survey of European Firms

We use firm-level survey data from 25 EU countries to analyse how firms adjust their labour costs (employment, wages and hours) in response to shocks. We develop a theoretical model to understand how firms choose between different ways to adjust their labour costs. The basic intuition is that firms choose the cheapest way to adjust labour costs. Our empirical findings are in line with the theoretical model and show that the pattern of adjustment is not much affected by the type of the shock (demand shock, access-to-finance shock, ‘availability of supplies’ 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, regardless of the source of the shock. Results for the 2008-09 period indicate that the ranking might change during deep recession 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 suggesting an asymmetric reaction to positive and negative shocks. Finally, we show that strict employment protection legislation and high centralisation or coordination of wage bargaining make it less likely that firms reduce wages when facing negative shocks.

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.

The Holy Grail of Crypto Currencies: Ready to Replace Fiat Money?

The rise of crypto currencies, notably bitcoin, has fueled new and old debates about money. We discuss attempts to complement or replace fiat money by ‘stablecoins’. In a first step, we review today‘s endogenous and debt-backed money. Second, we analyse attempts to use stablecoins in order to overcome the inherent speculative and deflationary design of fixed supply coins like bitcoin. Building on theories stating that economic and liquidity expansion go hand in hand we find that stablecoins have flexible supply designs. However, we also find that the algorithmically planned allocation of new coins, that is characteristic of stablecoins, is inferior to contemporary ways of money creation for two reasons: (i) it is not market-based and (ii) it is not backed by a ‘We Owe You’. Moreover, it builds on outdated monetarist theories in an attempt to control prices. We predict that crypto-monetarism in its present formulations will fail because quantity adjustments are not a sufficient condition for stable prices. Finally, regarding price stability, we suggest the importance of overcoming the illusionary dichotomy between the real and the financial circuit in (crypto) monetary policy. We show that, in the real world, firms set prices according to cost-based pricing rules, so that changes in unit labour costs correlate well with inflation. As a consequence, and in line with a path-dependent and institutional perspective on the labour market, coordinated wage bargaining appears vital to achieve price stability. Against this backdrop, we propose that wages have to grow in line with productivity plus the inflation target. Such an approach, if properly complemented with fiscal, interest rate and fx policies, would not only benefit price stability, but also financial resilience and economic development at large.

From Fixed to Flexible? Wage Coordination and the Collective Bargaining System in Italy

This article analyses the rules on wage coordination and their effectiveness in the Italian two-tier bargaining system. It seeks to cast light on bargaining coordination by starting from the analysis of collective agreements, rather than focusing exclusively on normative and institutional aspects of wage bargaining. Accordingly, the study examines a dataset of 498 company-level collective agreements concluded between 2012–2015 in three sectors – metalworking, food, banking and finance – to analyse wage developments in company-level bargaining. The study considers the extent to which local wage negotiations are consistent with the rules on wage bargaining coordination laid down in economy-wide agreements and national collective labour agreements. Wage coordination rules are generally respected, though a significant number of company-level agreements still provide fixed-rate pay rises in breach of the rule that wage increases at company level should be linked to productivity and other factors relating to the workers’ and/or the firm’s economic performance. Although the violation of wage bargaining rules between national agreements and company-level collective agreements is in line with the favourability principle, it is argued that local negotiations on fixed-rate pay rises could be regarded as a form of uncoordinated decentralization, diminishing the effectiveness of horizontal coordination policies and the normative role of the social partners.

Financialization, Technological Change, and Trade Union Decline

AbstractRecent research finds that financialization and technological change have had a variety of negative effects on labor, including reducing low-skill workers’ wages and increasing income inequality. In this article, I examine the effect on trade unions of one type of financialization, equity market development and one type of technological change, routine-biased technological change. I argue that we should conceptualize trade union strength in two dimensions: (a) the strength of their institutional structures, such as the degree of wage bargaining coordination and the degree to which firms can deviate from collective agreements; (b) the strength of their membership. Using data for 21 OECD countries from 1970 to 2010, I find a negative effect of equity market development on unions’ institutional structures, but not on union membership. Contrarily, I find that routine-biased technological change has a negative effect on union density, but an inconsistent relationship with the strength of unions’ institutional structures.

Challenging the EU Downward Pressure on National Wage Policy

In-work poverty is increasingly becoming a problem of major concern for many EU Member States. In the opinion of many, a common European wage standard could constitute a desirable and effective solution. However, Article 153(5) TFEU excludes the EU from competence on pay, preventing the EU institutions from taking any binding action to that end, while attempts to address the issue by soft law or coordinated wage bargaining have proven to be ineffective. Even so, the exclusion of the EU institutions from exercising competence in the area of pay has not prevented them from acting within the existing framework of European economic governance to issue recommendations aimed at cutting or freezing national minimum wages and public-sector wages or keeping their growth in check (wage moderation). The article considers whether there is room to challenge the EU encroachment on national wage policies as a way to restore to national governments and the social partners the freedom to address the question of wages according to their own best judgment.

Current Accounts and Coordination of Wage Bargaining

Current Accounts and Coordination of Wage Bargaining

Wage Bargaining, Inequality, and the Dutch Disease

The theory of the “Dutch Disease” predicts that income from oil and other natural resources produces negative economic consequences through two different mechanisms. The “Resource Movement Effect” suggests that workers leave manufacturing for higher-paying jobs in other sectors. The “Spending Effect” implies that spending resource wealth domestically leads to exchange rate appreciation. The combination of these processes results in the contraction of the export sector. This article explores how, and why, a country’s institutions may prevent the Dutch Disease before it starts. Incorporating insights from the “Varieties of Capitalism” literature, I find that the Dutch Disease is significantly less severe in countries with a high degree of wage bargaining coordination and with low income inequality. The former interrupts the Resource Movement Effect as it limits workers’ incentives to move out of the tradable sector. The latter moderates the Spending Effect because it prevents appreciation of the real exchange rate.

Resource curse avoidance: governmental intervention and wage formation in the Norwegian petroleum sector

A likely channel for Dutch disease turning a presumably blessing resource windfall into a curse, is the wage formation process. By utilizing the shift from decentralized and uncoordinated wage bargaining in the Norwegian petroleum sector to co-ordinated bargaining, this paper analyzes the effectiveness of a governmental intervention aimed at preventing the extraordinary petroleum wage inflation to become detrimental to the economy. The empirical analysis shows that the intervention was successful as insider weights and insider hysteresis effects were effectively reduced, and that the system of coordinated wage bargaining was re-established. The principal conclusion is that institutions and institutional setting play a crucial role in avoiding adverse economic development.

Coordination of Wage Bargaining, Exchange Rate Stability and External Adjustment

The literature on the determinants of the rate of current account reversion has been limited to examining the role of exchange rate regimes. We propose that the degree of coordination of wage bargaining affects the speed of current account adjustment. Our point estimates are economically and statistically significant, suggesting that fragmented firm-level wage bargaining facilitates external adjustment. We also find a strong negative interaction between the effects of coordination of wage bargaining and exchange rate stability on the rate of current account reversion.

Economic causes of the Eurozone crisis: the analytical contribution of Comparative Capitalism

The article discusses advances and limitations of Comparative Capitalism scholarship on the causes of the Eurozone crisis. It explains the crisis by highlighting four basic mechanisms: first, the absence of a system of coordinated wage bargaining has been made responsible for the loss of cost competitiveness. Second, the specialization in price-sensitive medium-quality goods and the corresponding loss of market sharesto emerging markets has been attributed to the weak innovation systems of Southern economies. Third, the loss of competitiveness has been masked temporarily by a strong increase of public indebtedness and, fourth, private household indebtedness. These four explanations do not put the blame for the Eurozone crisis on a single government or a single type of actors, but rather highlight the systemic causes for the crisis, brought about by the construction of a common currency for institutionally very heterogeneous economies.

Youth Unemployment in the OECD: The Role of Institutions

Summary This paper analyzes the role of labor market institutions for youth unemployment, as contrasted to total unemployment. The empirical results are basically consistent with an insider view of labor market institutions. Labor market institutions tend to protect (older) employees but might harm (young) entrants. Remarkable is especially the significant and very high effect of employment protection for regular jobs on youth unemployment. In addition, the combined effects of powerful unions and a coordinated wage bargaining system are beneficial for older people and detrimental to youth. Finally, the paper identifies a significant link between a demographic as well as an educational factor and both youth and total unemployment.

Democratic Limits to Redistribution: Inclusionary versus Exclusionary Coalitions in the Knowledge Economy

The knowledge economy, deindustrialization, and the decline of Fordism have undermined the economic complementarities that once existed between skilled and semiskilled workers. The result has everywhere been a decline in coordinated wage bargaining and unionization and a notable rise in labor market inequality. Yet, the political responses have been very different across advanced democracies. While labor markets for part-time and temporary employment have been deregulated across the board, some countries have compensated losers through increased cash transfers and active labor market programs and others have allowed inequality and insider-outsider divisions to grow deeper. The article argues that the divergent government responses reflect differences in underlying electoral coalitions, and that these in turn mirror the structure of party and electoral systems. The authors support their argument with evidence for government responses to economic shocks in the period 1980 to 2010.

Wage coordination in new and old EU member states

Aside from employment protection laws, which have been converging, other labor market institutions in new and old EU member states, such as wage bargaining coordination and labor union density, still differ considerably. These labor market institutions also differ among the new EU member states, with the Baltic countries being much more liberal than the others. Research that pools data on old and new EU member states shows that wage coordination mechanisms can improve a country’s macroeconomic performance. Stronger wage coordination and higher union density reduce the response of inflation to the business cycle.