Wage Determination Process Research Articles

Award Restructuring: Possibilities and Portents

AbstractThe major focus of contemporary industrial relations is award restructuring. This restructuring, with its potential to facilitate a better skilled, more flexible and more efficient workforce is integrally related to the National Wage determining process and the ACTU-ALP Accord. It is also a key to international competitiveness and the wellbeing of the manufacturing sector. In recent years the wage determination process has attempted to reduce those normative forces which industrial tribunals have institutionalized — in particular comparative wage justice and real wage maintenance. This attempt has created a number of tensions: control versus flexibility; cost of living versus productivity; centralism versus decentralism; paid rates versus minimum rates; supplementary payments versus over award payments; equity versus efficiency. The system’s capacity to resolve these tensions without merely returning to established wage settlement practices will determine the efficacy of the restructuring exercise. It will also shape the contours of industrial relations for the next decade.

A Quarterly Earnings Series for Manual and non‐Manual Workers in Great Britain

Recently some interest has developed in examining the wage determination process for manual and non‐manual workers. However, no published disaggregated series exists long enough to permit any econometric investigation requiring large sample properties. A disaggregated average earnings series of quarterly observations is presented derived from 18 annual observations published by the British New Earnings Survey.

Labor’s inequality of bargaining power: Changes over time and implications for public policy

A major justification for enacting the Wagner Act and encouraging collective bargaining was that in the wage-determination process individual workers suffer from an inequality of bargaining power vis-a-vis employers. This critical review of this justification examines the analytical meaning of the concept of an inequality of bargaining power, the factors responsible for this inequality, the change that has taken place in labor’s disadvantage since the 1930s, and the implications for national labor policy. It is concluded that some employers continue to have significant market power over wages but that the extent and degree of labor’s disadvantage in bargaining has diminished substantially since World War II. The implication is that the Wagner Act’s protection of the right to organize remains in the social interest but that the bargaining power of labor unions should be further circumscribed to preserve a balance of power in wage determination.

Unionism and the Structure of Male Wages for Youth

Trade unions appear to exercise an influence on the wage determination process beyond that generally associated with award determination. Union wages are 13.12 per cent higher than non-union wages, other things being the same. The wage gains won by trade unions for their members, occupation and industry of employment, and workers' degree of job satisfaction are found to influence the decision about whether to be a member of a union. These broad features of unionism and union wage effects are not dependent on the degree of compulsion in the union membership decision.

Differences in economic fluctuations in Japan and the United States: The role of nominal rigidities

This paper examines the differences between economic fluctuations in the United States and Japan during the period from 1972 through 1986. During this period the size of the fluctuations in real output in Japan was much smaller than in the United States. This difference is independent of the method of detrending and shows up clearly in simple time series plots. Using vector autoregressions and their moving average representations, important differences in the dynamics of inflation and output are uncovered. These differences are examined using a macroeconomic theory that combines monetary factors and slow wage adjustment. The theory suggests that differences in wage determination and monetary policy can explain many of the differences in output and price fluctuations in the two countries. The difference in wage determination is attributed to the synchronized wage determination process in annual Shunto in Japan rather than to profit sharing via the bonus system.

Corporate control and management compensation: Evidence on the agency problem

AbstractThis paper finds a relationship between management compensation and corporate control consistent with the hypothesis that in closely held companies major shareholders engage in monitoring activities that reduce the residual loss portion of agency costs. This result is incosistent with Fama's (1980) suggestion that the wage determination process in managerial labor markets may resolve the agency problem.

Post-Institutionalism in Labor Economics: The Forties and Fifties Revisited

This paper describes and evaluates the analytical model of the labor market developed by prominent labor economists of the 1940s and 1950s. The author argues that the post-institutionalist model made significant and lasting contributions to the analysis of labor mobility and the process of job search; to the formulation of models of union policies and the evaluation of the impact of collective bargaining; to the analysis of the factors that shape internal wage structure and contribute to the rise of internal labor markets; and, by its emphasis on the critical role played by the forces of demand, to the analysis of the wage determination process.

Wages Policy and Unemployment in Australia

It is generally accepted among Australian economists that high rates of growth of wages at various times over the last decade have made the achievement of full employment and lower rates of inflation more difficult. Fear of a further acceleration of wage growth has also been a policy constraint. It is when one attempts to go further that considerable disagreement becomes evident. From a labour market viewpoint, there does not seem to be a consensus as to the answers to the two broad questions that should be addressed. First, how important are wage changes relative to other factors that depress employment and add to the inflation rate? Second, how does government policy impinge on the process that generates wage changes? To do justice to both of these in a paper as short as this one is difficult, so I shall focus most of the paper on the second question. The relationships between government policy and wage changes are particularly important at this time. For most of the last decade, successive governments have operated a national wages policy, which to a large degree has been based on the indexation of wages for past price changes. The latest experiment, the Prices and Incomes Accord, is the centrepiece of the current government's employment and inflation policy, and, after almost two years of wide community and media support, the key principles upon which it is based are suddenly being questioned.1 Our prime endeavour, therefore, will be to build up sufficient understanding of the wage determination process so that some evaluation can be made as to the effectiveness of these national wage policies. This turns out to be a remarkably difficult task which generates considerable concern in our mind that the data may not be sufficiently rich to serve as a basis for sound judgments. It does appear, however, that the effect of a given level of unemployment upon wage changes has consistently weakened over the last decade. Why this should be so is a major unresolved puzzle. I-offer a loosely constructed theory that is consistent with the facts, but it is by no means the only possible explanation. Section I provides a description of wage-setting in Australia and some key facts of the economy. In Section II the statistical analysis of wage changes focuses on two competing theories: one is the Phillips curve approach, and the other stresses that wage outcomes may be, to a significant degree, independent of the level of unemployment and may depend instead on utilization rates of labour -within the firm. Section III considers the efficacy of incomes policies in Australia. Some final comments areoffered in Section IV.

The Long-Term Implications of the Hancock Report

Although much of the Committee's Report is widely supported, the major disappointment of business is with the self-imposed constraints of alleged 'industrial realities' and traditional attitudes. The emphasis in the Report was on strengthening and improving the workings of centralized institutional mechanisms and third party intermediaries rather than on devising means of building better, more productive employer-employee relationships. A preferable reform agenda would have tackled the fundamental problems of the system: the imbalance of power between employers and unions (which would be exacerbated by the Committee's recommendations); various structural and institutional impediments which further orient the focus of action away from the enterprise and seriously restrict the scope for more flexibility and economic sensitivity in our wage determination processes; and community attitudes, which reflect rights, entitlements, resistance to change, and which are fatalistic in relation to prospects for fundamental reform.

Political and Industrial Change in a Model of Trade Union Militancy and Real Wage Growth

The paper forwards an analytical formulation of the wage generating process in which trade union militancy and real wage movements interact. Key features of the advanced model are (1) a clarification of the role of macropolitical variables and of changing industrial composition in the wage determination process and (2) a simple explanation of why increasing unemployment and accelerating real wage growth may raise trade union militancy. The empirical results obtained for West Germany support the proposed model and stress the importance of treating labor militancy as a latent, unobservable variable which relates to multiple indicators and may be subject to measurement errors.

Companies, Industries, and the Measurement of Economic Segmentation

There has been much debate in the growing literature on economic segmentation on the relative merits of companyand industry-level measures of economic structure. The current analysis suggests that this debate has been incorrectly posed. Both companies and industries represent meaningful units of analysis that embody consequences for economic segmentation. The most important company characteristic in the wage determination process is found to be plant employment size. The most important industrial characteristic is found to be level of capital usage. Companyand industry-level sectoral measures are also compared and evaluated. These sectoral measures are associated only to a moderate degree and have distinct consequences for labor force outcomes. Together, these findings suggest distinct roles for company and industrial models of economic segmentation. The paper concludes with the argument that companies and industries represent distinct levels of economic segmentation, each of which deserves conceptualization in its own right.

Macroeconomic Determinants of Wage Adjustments in White-Collar Occupations

T HERE is no professional consensus about the process of aggregate wage inflation. A spectrum of opinion exists between the following extreme poles: (1) That wages are determined instantaneously in markets where participants have rational expectations and can anticipate in their behavior the long-run consequences of any consistent pattern of macro policy making;' and (2) that wages are determined largely by institutional forces including considerations of equity, normal historical wage patterns, union strength, and current bargaining conditions.2 Adherents of these polar positions have little respect for wage adjustment equations of the Phillips (1958) or Phelps (1967)-Friedman (1968) variety in which wages are related structurally to aggregate unemployment rates. These adjustment equations occupy a middle ground in the spectrum and are currently used in large scale econometric models to explain how the effects of a change in demand are distributed into real and price components. Between the poles are several alternative justifications of wage-unemployment relationships. Among these are the following views: That wages are determined as in (1) above except for the existence of long-run contracts;3 that the determination of expectations about future prices can be fairly approximated by a distributed lag on past prices;4 that it is past prices rather than expectations of future prices that are important;5 and that economic conditions are but one of a set of factors to be included in the current bargaining conditions that determine wages.6 Which of these views best describes the process of wage determination is an empirical question, but the question is quite complicated and does not appear to be capable of resolution through a single, conclusive test. Many issues are involved simultaneously and no one has been able to find a set of workable assumptions that can be agreed upon by all as being a sensible way to proceed. The question of wage determination continues to divide macroeconomic opinion more than any other single issue. This paper reports results of empirical work on wage equations in which a strategy of disaggregation has been followed. It is part of a larger project to estimate the dependence of the natural rate of unemployment on the distributions of the supply and demand for labor according to location and occupation. As an estimation strategy, disaggregation can avoid problems of identification and could, in principle, provide a way to distinguish among the many competing hypotheses in this area. In practice, the disagreements are so fundamental and the possible tests so limited that the results can be offered as no more than an extension of the wage equation literature rather than as a resolution of the issue of whether wage equations should be treated as structural relations or, of even greater ambition, what those relations might be. The extension provided follows the direction of Baily and Tobin (1977, 1978) who hypothesized that the rate of wage change in a single labor force group should depend on the unemployment rate of that group and its wage relative to the wages of other groups. The results are interesting for several reasons. First, the wage data that are used in these tests come from a survey not previously used in the estimation of aggregate wage equations. The data are from the National Survey of Professional Administrative, Technical and Clerical Pay (PATC).7 This survey is conducted annually by the Bureau Received for publication September 18. 1981. Revision accepted for publication May 4, 1982. * The University of Wisconsin. The author wishes to thank Gregory Krohn and Bruce Chapman for their excellent research assistance. Helpful comments were received from Paul Gertler and the participants at a seminar at the National Commission for Employment Policy. This research was supported by Grant Number 99-0-2289-50-11 from the National Commission for Employment Policy, and Contract Number 20-06-08-11 from the Employment and Training Administration, U.S. Department of Labor. ' See, for example, Lucas (1973) and Sargent and Wallace (1975). 2See Dunlop (1977). 3See Phelps and Taylor (1977) and Fischer (1977). 4McNees (1979) provides a way to distinguish this position from the one in the subsequent phrase. 5 See Okun (1978) for a summary of studies of this kind. 6See Hicks (1955) and (1974, pp. 59-85). Bureau of Labor Statistics (1980).

Occupational Earnings, Compensating Differentials, and Human Capital: An Empirical Study

This paper examines the empirical significance of the principle of compensating differentials for the occupational distribution of earnings in Canada. The estimated earnings equation relates differentials in earnings to differences in human capital investments of workers, training requirements, and other non-pecuniary characteristics of occupational employments. The evidence suggests that wage differentials are primarily 'equalizing differentials': workers receive higher pay in compensation for their higher schooling and work experience and for undertaking jobs that are risky, insecure, and require higher levels of general educational development and specific vocational preparation. The evidence also confirms the findings of hedonic wage equations that returns to schooling and experience may be biased when occupational requirements are not controlled. Salaires dans diverses occupations, diffrrentiels compensatoires, et capital humain: une etude empirique. Ce memoire examine la signification empirique du principe des diff6rentiels compensatoires pour expliquer l'eventail des salaires selon les occupations au Canada. Une equation des gains estimes etablit la relation entre les salaires et les differences dans les investissements en capital humain des travailleurs, la longueur de la periode d'apprentissage necessaire, et les autres avantages non-pecuniers attaches 'a une occupation. Les resultats suggerent que les differentiels de salaire sont d'abord et avant tout des diff6rentiels qui vont dans le sens de l'egalisation: les travailleurs reqoivent un salaire plus eleve en compensation pour le niveau d'experience et d'6education plus eleve qui est necessaire, et pour des travaux plus dangereux, moins stables et requerant des niveaux eleves d'instruction et une preparation particuliere. Les resultats confirment aussi les resultats derives d'equations de salaire de type hedonique indiquant que les rendements sur l'investissement en instruction et en experience peuvent etre fausses si on ne standardise pas les exigences des differentes occupations. The principle of compensating differentials outlined by Adam Smith in The Wealth of Nations is one of the many ideas of classical economists that have become a 'common place of economics. '1 The idea that differences in pecuniary wages are required to The authors wish to thank Steve Kaliski, Mike Abbott, and the Editor and anonymous referees for their helpful comments and suggestions. The financial assistance from Labour Canada on the initial phases of this study is gratefully acknowledged. 1 See Rees (1975) and McNulty (1980). According to Rees, 'Of the many ideas of Adam Smith that have stood the test of time, few have weathered better or are still more relevant than the idea of compensating wage differentials ... it would be hard to imagine a theory of relative wages that did not Canadian Journal of Economics / Revue canadienne d'Economique, XV, No. 3 August / aoet 1982. Printed in Canada / Imprimd au Canada 0008-4085 / 82 / 0000-0442 $01.50 (? 1982 Canadian Economics Association This content downloaded from 157.55.39.27 on Wed, 07 Sep 2016 06:38:18 UTC All use subject to http://about.jstor.org/terms Occupational earnings, compensating differentials / 443 compensate for the non-pecuniary advantages and disadvantages of different employments has remained in its original form for over two hundred years as an established analytical framework for the analysis of wage differentials. In recent years the principle of compensating differentials has sparked considerable theoretical and empirical interest in earnings distributions and their relationship with worker and job attributes. On the theoretical side the compensating principle has inspired the development of two major applied and policy-oriented economic models, the human capital theory and the recent hedonic wage function approach; while the human capital model emphasizes the significance of individual investment behaviour in the heterogeneity of labour incomes and singles out the length of training-formal schooling and informal training or work experience-as the principal compensating wage differential, the hedonic approach focuses on 'quality' variations in both worker and job attributes as an explanation for wage differences. Both models provide empirical conceptualization of the compensating differentials principle and have contributed significantly to a better understanding of labour market behaviour and wage determination processes. On the empirical side the availability of large data sets, incorporating information on both individual worker traits and job characteristics and requirements, and high-speed computers has helped in overcoming difficulties of measurement, thus facilitating empirical estimates of 'compensation' for non-wage characteristics. Consequently, in the past few years there has been a long line of empirical research in the United States relating wage differences to differences in worker and job characteristics.2 These studies have found considerable evidence of compensating wage differentials for jobs requiring additional years of training, together with positive average rates of return on the individual worker's human capital investments. The evidence on the direction and magnitude of compensating differentials for other characteristics, however, is so far inconclusive. Empirical work on these problems is practically non-existent in Canada, largely owing to the absence of appropriate data

Recent Union Contract Concessions

SINCE 1979, union contract concessions have occurred with increasing frequency. Substantial press attention has been devoted to these concessions along with other ills plaguing organized labor such as the declining proportion of union members in the work force and political difficulties with the Reagan administration. Popular accounts of these trends often suggest that a turning point in union wage determination and industrial relations has been reached. It is clear that the current climate for large wage settlements, both union and nonunion, is unfavorable. The general economic slack since 1979 and the deceleration of price inflation that began in 1981 suggest that the rate of wage increase in the near future should be lower than in the recent past. Such behavior by itself does not represent a break from past processes of setting wages; empirical wage equations have long suggested that recession and declining price inflation would have such an effect. Although the concessions have been confined thus far to distressed industries, it might be hypothesized that they would have spillover effects on wages elsewhere. Such spillovers could produce short-term wage settlements below what standard wage equations would predict. Or it might even be argued that recent concessions will prove to represent fundamental changes in wage-determination processes for the longer run, particularly changes that would make wage inflation more sensitive to real business cycle conditions. In this paper I address three questions. First, is the current episode of union wage concessions unprecedented? The answer turns out to be

A MODEL OF THE PUBLIC SECTOR WAGE DETERMINATION PROCESS--WITH SPECIAL REFERENCE TO INSTITUTIONAL FACTORS

Once the analysis is brought to this level, such overarching factors as the economic pressures of alternative wages and the institutional/legal constraints governing development of the formal bargaining relationship may be introduced as limitations on the parties’ latitude in reaching agreements. This chapter describes the public sector wage determination process to show how certain factors close to the collective bargaining process itself affect the behavior of the participants and the outcomes of negotiations. Bargaining units may be broad or narrow in terms of the different kinds of employees included in them. Several fragmented bargaining units, for instance, may enable public employees to engage in a pattern of “leapfrogging” wage adjustments over each other. The organizational structure of the public employer has important consequences for wage determination. For example, the motives of staff in the organizational subunit responsible for carrying out negotiations will affect their stands at the bargaining table.

The National Accord as a Social Contract

In September 1979 the Carter administration and the AFL-CIO issued the text of a National Accord, which discussed general principles to be followed in several areas of economic and social policy. In combining discussions of pay-price policy and other economic and social issues, the accord resembles “social contract” arrangements in several Western European countries. This invited paper assesses the viability of the National Accord as a social contract by examining three interrelated issues: the suitability of the accord as an institutional mechanism to secure wage and price restraint, given the characteristics of the underlying wage-determination process in this country; the breadth of institutional representation in the negotiations leading to the accord; and the ability of the negotiators to deliver on their commitments. The author concludes that the accord fails on all those counts to be an effective social contract, but he also argues that any social contract approach to wage and price restraint is unlikely to be successful in this country.

Wage Indexation in Australia and the Role of a Gross Earnings Deflator

The wage determination process in Australia operates substantially under the guidelines set down by the Australian Arbitration and Conciliation Commission. The commission's primary role is to set minimum award rates, through award wage rate, work value and wage indexation hearings. Some wage drift has occurred in teh past through increased collective bargaining, but the Commission still dominates the wage fixing process. The most important aspect in recent years of the Commission's role, has been that of attempting through wage indexation hearings, to compensate workers for the effects of inflation. When the original guidelines were considered in April 1975, it was envisaged that in addition to full indexation for inflation, there would be an annual productivity case. The outcome though has been primarily the granting of indexation gains and these only partial in many cases. This has resulted not only from pressure to restrain wage increases, but also confusion over just what index on which to base indexation. In this paper we shall show that this confusion is justified since the index upon which it is currently based is inappropriate for the task set before the Commission.

Wages, Flexible Exchange Rates, and Macroeconomic Policy

In an open economy with a floaLing exchange rate, the efficacy of fiscal and monetary policy depends fundamentally on the wage-setting pnxiess. In the canonical models of Mundell and Fleming, monetary expansion raises output via an exchange rate depreciation, while fiscal expansion has no output effect. These results hold only when real wages can be altered by exchange rate movements; if the real wage is fixed, the Mundell-Fleming ranking of policy is reversed. This paper explores the interaction of wages and policy in short- and long-run models, under the assumptions of perfect foresight and world capital mobility. After seven years of floating exchange rates, the implications of Hexible rates for countercyclical macroeconomic policy remain in douht. The traditional view, following the pioneering work of Mundell 1196;?) and Fleming [1962] (henceforth M-F), is that expansionary monetary policy, hy inducing depreciation ofthe real exchange rate, is effective in raising output in a small, underemployed economy. Fiscal policy, on the other hand, is seen as less effective. In the standard analysis, a rise in government spending leads to appreciation and crowding-out of net exports. An alternative view of flexihle rates, set forth in the full-employment models of glohal monetarism, maintains that a money supply expansion can change only the exchange rate and price level, but not output and employment. While an increase in money causes depreciation ofthe nominal exchange rate, the domestic price level rises to offset the competitive gain envisaged in the M-F model. The alternative view has had less to say on the effects of fiscal policy and on the general question of prolonged unemployment. Both views of monetary policy have adherents, and there is evidence, in different countries and at different times, to support each. Their appropriateness, I shall argue here, depends crucially on the nature of the wage-determination process. The M-F model (in an extended form) requires that nominal exchange-rate changes alter the real wage.^ Implicit is an underlying view, going hack to Keynes,

A Microeconometric Analysis of Spillovers within the Canadian Wage Determination Process

T HE objective of this paper is to develop and test models of wage spillovers utilizing a large micro data base constructed from Canadian collective bargaining wage contracts signed between 1966 and October 1975 (the introduction of wage controls in Canada). There are two basic approaches to the wage spillover hypothesis that can be found in the literature. 1 Institutional spillover models, characterized by Dunlop's wage contours and Ross' orbits of coercive comparisons, emphasize the distributional structure of wage rates between occupational-industrial groups. A second approach follows the tradition of microeconomic labour market theory and emphasizes relative wages, labour mobility, labour turnover costs, etc. For example, a simple Marshallian model would include both the firm's own wage rate as well as competing wage rates as determinants of labour supply (and consequently wage changes). More recently Phelps (1968) has proposed a generalized excess demand model of frictional labour markets in which a profit-maximizing firm establishes an optimal wage differential between its own wage rate and competing wage rates.2 Unfortunately it may be impossible to identify empirically the precise origin of wage spillover effects. The existence of wage spillovers is totally consistent with economic models of wage determination as well as being consistent with institutional hypotheses that emphasize bargains, wage leadership, pattern wage adjustments, maintenance of historical wage differentials, etc.3 Thus, our interpretation of the theoretical rationale for wage spillovers must, of necessity, be somewhat agnostic. Turning to the empirical evidence, three studies have advanced evidence pertaining to wage spillovers, each study based on a very different statistical methodology. Perhaps the classic study in this area is the Eckstein-Wilson (1962) paper which emphasizes a number of institutional aspects of the wage determination process. Eckstein and Wilson provide empirical evidence, based on the of specific wage rounds, supporting a combined market-institutional spillover model of wage determination within the U.S. manufacturing sector. For a key of industries, identified largely from impressionistic evidence, wage changes are determined by profit and unemployment rates based on the aggregate rates for all industries within the group. Outside the group of industries, wages are principally determined by wage spillovers from the group. Unfortunately, the underlying wage round technique employed by Eckstein and Wilson is notoriously difficult to implement, i.e., to identify unambiguous aggregate wage rounds. McGuire and Rapping (1967) have challenged the Eckstein-Wilson study on the grounds that at best their evidence lends weak support to their institutional hypothesis, that their central result for the group of industries is ambiguous, and finally that they have not resolved the problem of distinguishing between neo-classical labour supply forces and institutional spillover effects. McGuire and Rapping's own model (1968), which is tested with cross-sectional data (industries at the state level), reveals that while market forces play an important role in the relative wage determination process for the U.S. manufacturing sector, wage spillovers from steel and automobile bargains (particularly steel) are also relevant explanatory variables. Received for publication July 13, 1978. Revision accepted for publication May 23, 1979. * University of Guelph. We gratefully acknowledge the helpful comments that we have received from Doug Auld, David Dodge, Mark Mueller, and John Vanderkamp. This paper could not have been written without the financial support of the Anti-Inflation Board and the diligence of an exceptionally fine research assistant, Jane Forster. None of the above-named individuals, nor the Anti-Inflation Board, should be held responsible for the arguments and conclusions of this paper. 1 For a thorough review and critique of spillover theories, see Burton and Addison (1977). 2 This optimal wage differential takes into account the turnover costs associated with recruiting, hiring, and training new workers. 3 For further discussion of this identification problem, see Addison and Burton (1979). [ 213 ]

A Microeconometric Analysis of the Canadian Wage Determination Process

The objective of this paper is to analyse the Canadian wage determination process using micro-data derived from individual union wage contracts, signed during the 1966-1975 time period. Conventional wage studies based on aggregate time series are subject to a number of important econometric criticisms arising from their failure to specify correctly the institutional features of the labour market (such as multi-year contracts, deferred increments and the variability of the bargaining calendar). Use of micro-data prior to aggregation not only avoids most of these institutional econometric problems, but also makes possible a precise investigation of several important theoretical and policy issues. In particular, it is possible to separate expected inflation from uncompensated past inflation and to investigate the impact of each type of inflation on the wage determination process. We also pay attention to the changing structure of the Canadian labour market and to the possible impact of the 1971 Unemployment Insurance Act (UIA) revision on Canadian wage inflation.