Prices,Productivity and Wage Bargaining in Open Economies*

According to the standard union bargaining model, unemployment benefits should have big effects on wages, but product‐market prices and productivity should play no role in the wage bargain. We formulate an alternative strategic bargaining model, where labour and product‐market conditions together determine wages. A wage equation is derived and estimated on aggregate data for four Nordic countries. Wages are found to depend not only on unemployment and the replacement ratio, but also on productivity, international prices and exchange rates. There is evidence of considerable nominal wage rigidity. Exchange rate changes have large and persistent effects on competitiveness.     

Real wage cyclicality in the Eurozone before and during the Great Recession: Evidence from micro data

We study the response of real wages to the business cycle in eight major Eurozone countries before and during the Great Recession. Average real wages are found to be acyclical, but this reflects, in large part, the effect of changes in the composition of the labour force related to unemployment variations over the cycle. Using longitudinal micro data from the ECHP and SILC panels to control for composition effects, we estimate the elasticities of real wage growth to unemployment increases between −0.6 and −1 over the period 1994–2011. Composition effects have been particularly large since 2008, and they explain most of the stagnation or increase in the average wage observed in some countries from 2008 to 2011. In contrast, at a constant labour force composition in terms of education and experience, the figures indicate a significant decrease in average wages during the downturn, particularly in countries most affected by the crisis. Overall, there is no evidence of downward nominal wage rigidity during the Great Recession in most countries in our sample.     

Labor taxation, public finance, and wage determination: evidence from OECD countries

This paper analyzes the relationship between unemployment, average effective labour tax rates and public spending in 17 OECD countries. The focus is on the degree of centralization and cooperation in wage setting. Estimation results from a dynamic time-series-cross-section model suggest that the countries where wage setting takes place at the firm level have used labour taxes less extensively in financing welfare spending, compared to countries with centralized or decentralized bargaining. This is consistent with another finding, according to which labour taxes distort the labour demand the least in the countries with firm level bargaining.     

Labour market institutions and wage setting: evidence for OECD countries

The main channel through which labour market institutions are supposed to work in affecting unemployment is through their effects on the key parameters of the wage curve. In particular, labour market institutions may have both a direct wage push (or level) effect, i.e. change the level of the real wage for any given level of the unemployment rate and productivity, and an indirect slope effect, i.e. change the responsiveness of the real wage to the unemployment rate. The question this article addresses is whether there is any evidence that these transmission mechanisms were at work in a group of 20 Organization for Economic Co-operation and Development (OECD) countries over the period 1960 to 1999. The analysis is accomplished in two steps. Pooled Mean Group (PMG) estimates of a wage equation including unemployment, productivity and a set of wage push institutions are first obtained, allowing only a subset of institutional coefficient to be homogeneous, while leaving the unemployment and other coefficients free to differ across countries. The country specific estimates of the unemployment coefficients are then used to investigate whether and to what extent cross-country heterogeneity in the estimated wage response to unemployment is related to institutional differences. The results support the existence of significant wage push effects of union density and benefit replacement rates, and of significant slope effects of benefit replacement rates, benefit duration and employment protection. A more generous unemployment benefit structure is found to lower the wage responsiveness to unemployment, while higher employment protection, contrary to what one expects, is found to enhance it. No significant level and slope effects are found for the tax wedge and bargaining coordination.     

Marriage and employment participation with wage bargaining in search equilibrium

We build an equilibrium search model where married couples make joint decisions on home production and labour market participation and analyse the implications of our results for a frictional marriage market. A worker's bargaining position reflects their productivity, and the productivity and employment status of their spouse. People sometimes accept transitory jobs only to raise the spouse's long-term wages. Firms sometimes reduce turnover by unilaterally increasing a worker's wage, ensuring that the spouse stays at home.     

Understanding wage determination in a multi-level bargaining system: a panel data analysis

This article presents an estimation of the elasticity of actual wages to industry-level collective bargaining thereby quantifying empirically the role of industry-level bargaining on wage determination. For this purpose, we use a unique employer–employee panel dataset covering the entire Belgian employment population over 9 years (1998–2006). Like several other European countries, e.g. Germany, France, Italy and the Netherlands, Belgium has a relatively centralised wage bargaining system, with the industry level playing the most important role. Regression results confirm that wage increases collectively decided at the industry level are, on average, fully passed on to individual wages. In addition to industry-level bargaining, we are interested in the supplementary wage increases granted at the firm level, referred to as wage drift or wage cushion in the literature. Our estimates show that wage drift is affected by company size, by the economic performance of the industry and to a much lesser extent by labour market tensions as measured by the local unemployment rate. Interestingly, our results show that industry-level bargaining also takes most of these features into account.     

On the optimality of a minimum wage: New insights from optimal tax theory

We build a theoretical model to study whether a minimum wage can be welfare-improving if it is implemented in conjunction with an optimized nonlinear income tax. We consider this issue in a framework where search frictions on the labor market generate unemployment. Workers differ in productivity. The government does not observe workers' productivity but only their wages. Hence, the redistributive policy solves an adverse selection problem. We show that a minimum wage is optimal if the bargaining power of the workers is relatively low. However, if the government controls the bargaining power, then it is preferable to set a sufficiently high bargaining power.     

The minimum wage and the Lithuanian labour market

This paper presents a comprehensive and non‐standard labour market analysis based on univariate and multivariate models for wages. The novelty of this paper lies in the use of non‐normalized cointegrating vectors for labour market analysis. Wages are the basis of labour market models, as well as the key factor for employees and employers; therefore, the central analytical axis is a classical wage bargaining process, where one side requires and the other side proposes a certain level of wages. Analysis is divided into two parts: foremost, a careful analysis of Lithuanian wages is conducted and a univariate model for the investigation of interactions between the minimum wage and the rest of the wages is proposed; only after the minimum wage model is drafted can the multivarate model for the whole economy be built up. Briefly, the methodology used in this article can be annotated as a synthesis of sequential theoretical and empirical considerations that combine the results of theoretical macroeconomics with data‐generating patterns and stylized facts. The model is considered as the final one only if macro‐theory preconditions, statistical prerequisites, and stylized real‐world requirements are met and fulfilled. In addition, this article gives an example and a quantitatively, as well as qualitatively, motivated suggestion as to how to incorporate minimum wages into econometric models and puts forward an explanation for why it is necessary to include minimum wage dynamics into labour market analysis. The article is nothing but an empirical case study that demonstrates how many minor details have to be taken into account until a realistic labour market model is built up. Although the paper deals with the labour market, the suitable application of time series methods is the main subject of the analysis.     

Are wages and productivity converging simultaneously in Euro-area countries?

A convergence analysis is applied to wages and productivity for Euro-area countries in the period from 1981 to 2001. The results show a reduction in the dispersion of wages and unit labour costs, but not in productivity. Different patterns are found for real and nominal wages: higher levels of inflation in countries with higher growth rates of unit labour costs have caused nominal wages to move towards equalization. Moreover, disparities in all the variables have remained more or less the same since 1997, suggesting that the establishment of a single currency area has not accelerated the process of wage equalization.     

The wage curve before and during the Greek economic crisis

Using cross-sectional data from the Labour Force Survey, we investigate whether a wage curve, i.e. a negative relationship between real wages and regional unemployment, could be estimated in the Greek labour market and in the period 1999–2014. Adopting individual static and regional dynamic specifications, our results do not support the existence of such a relationship despite the extensive macroeconomic adjustment of real wages after 2009. However, allowing for period-specific heterogeneous slopes, we find that a negative relationship between wages and regional unemployment emerged in the period 2010Q2–2011Q4 which however was short-lived. This relationship appears to be exclusively due to the restructuring of the collective bargaining regime and the reduction in the national minimum wages, both of which were implemented in the private sector.     

Robust central banking under wage bargaining: Is monetary policy transparency beneficial?

We study the role of transparency in an environment of robust monetary policy under wage bargaining. The standard view from the game-theoretical literature is that, with unionised labour markets, monetary policy transparency is unambiguously “bad” (it induces increases in wage and price inflation, unemployment and may lead to higher inflation uncertainty). The empirical literature is instead ambiguous about the macroeconomic effects of transparency. By recasting the earlier theory into a robust monetary policy environment, and focusing transparency on the uncertainty about the preference for price stability, we show that the macroeconomic effects of transparency are more favourable than normally found. The impact on nominal wages, inflation and real variables (real wages and unemployment) is not parameter-free but depends on the public's informedness about this coefficient. The impact on real variables is found to disappear in case unions do not internalise the effect of wage decisions on the economy (i.e. in the case of atomistic unions). Finally, we find that the effect of transparency on inflation uncertainty is more complex than in the standard approach. We show that transparency may have the beneficial effect of reducing inflation variability not only when monetary uncertainty is low (as previously reported), but also when monetary uncertainty exceeds an upper threshold.     

Minimum wage, exports and growth

Using an endogenous growth model in an open economy, we study the impact of minimum wages on growth for an innovator country. We state that a minimum wage shifts efforts from production to R&D, but only in an open economy. Thus, it speeds up long-run growth in proportional to exports. Calibrations suggest the growth surplus can be significant. An empirical study on 11 OECD countries illustrates these results. The impact on welfare is ambiguous because the minimum wage induces unemployment. However, we show that in an open economy, a minimum wage associated with unemployment benefits can Pareto dominate laissez-faire.     

The role of unemployment in wage determination: further evidence on the wage curve from Turkey

This paper presents an empirical estimation of the correlation between wages and regional unemployment rates in Turkey, more specifically it explores the role of regional unemployment rates in wage determination. The analysis builds upon a series of recent empirical studies on the wage-unemployment relationship, now commonly known as ‘the wage curve’, a downward sloping curve in wage-unemployment space. The existing studies are for most part in advanced market economies, while this paper presents one of the few attempts at a wage curve analysis within the context of a developing market economy. A cross-sectional estimation of micro level individual wage data for the Turkish labour market in 1994, suggest a statistically significant negative correlation between wages and regional unemployment rates. Separate regressions for men and women, however, show a wage curve to exist only in the male labour market. The study also presents the results on other variables of wage determination such as returns to schooling, returns to age, job tenure, gender, industrial and occupational affiliation of the worker, economic sector and union status.     

Trade, Wages and Unemployment in the Presence of Hiring and Firing Costs

This paper offers a new explanation of the recent Australian wage inequality and unemployment experience. Building on a standard international trade model, it is argued that trade affects wage inequality and unemployment through changes in the bargaining power of different groups of workers in the presence of hiring and firing costs. This allows previously puzzling aspects of the trends to be explained, including the inconsistency of the existing Stolper-Samuelson trade explanation with rising relative skilled wages at the same time as rising skilled labour intensity of production. Considering differences in labour market institutions, in particular hiring and firing costs and minimum wages, allows differences between the experiences of Australia, the USA and Europe to be explained.     

Lower Tax Progression, Longer Hours and Higher Wages

The impact of tax reforms that decrease income tax progression is analysed in an equilibrium search model with wage bargaining and endogenous individual working hours. Working hours are either bargained together with the hourly wage (case 1) or determined solely by workers after bargaining over the wage (case 2). In both cases reducing tax progression increases working hours of employed and, more interestingly, unambiguously increases wages and unemployment. Wages and unemployment rise more and working hours and production less in case 1 compared to case 2, probably making case 2 countries best suited for such tax reforms.
JEL Classification : H 24; J 22; J 41     

Equilibrium unemployment with outsourcing and wage solidarity under labour market imperfections

We evaluate the effects of outsourcing and wage solidarity on wage formation and equilibrium unemployment in a heterogeneous labour market, where wages are determined by a monopoly labour union. We find that outsourcing promotes the wage dispersion between the high- and low-skilled workers. When the labour union adopts a solidaristic wage policy, it will dampen this tendency. Further, higher outsourcing will increase equilibrium unemployment among the high-skilled workers, whereas it will reduce it among the low-skilled workers. Overall, outsourcing will reduce economy-wide equilibrium unemployment under the reasonable condition that the proportion of high-skilled workers is sufficiently low.     

Price and quantity adjustments in the Austrian labour market

Austria is among the very few countries in the European Union which have managed to maintain comparatively low unemployment rates and high employment rates. This study looks at the price and quantity adjustment mechanisms in the Austrian labour market which may have contributed to this favourable outcome. After reviewing briefly the basic theoretical reasoning an empirical investigation is began into gross flow dynamics in the labour market and the cyclical volatility of employment and unemployment in Austria. In international comparison Austrian unemployment is very stable over the business cycle. This is due mainly to the high sensitivity of the labour force on cyclical conditions and, partly, also on the relatively weak responsiveness of employment to cyclical fluctuations in output, the latter being possibly attributable to the high degree of real wage flexibility in Austria. The study proceeds to show that the long-run elasticity of wages with respect to unemployment is indeed quite high in Austria. However, evidence was also found for outsider effects in the Austrian wage setting process. Relative wage structures, on the other hand, appear to be rather rigid.     

A dynamic spatial panel data approach to the German wage curve

A wage curve is a decreasing function of wages on the regional unemployment rate. Most empirical studies on the wage curve ignore possible spatial interaction effects between the regions which are the primary units of research. This paper reconsiders the western German wage curve with a special focus on the geography of labour markets. Spillovers between regions are taken into account. The paper tests whether the unemployment rate in the larger surrounding region also affects wages. In addition, agglomeration effects and effects of local monopsony are assessed.The main database is a random sample of 974,179 employees observed over the period 1980-2004 and covering 326 NUTS3 units (districts). This rich data set is used to estimate a dynamic wage curve according to the two-step approach of Bell et al. (2002). In the first step one controls for individual heterogeneity and in the second step one allows for spatial effects of unemployment across regions on wages. We check the sensitivity of this wage elasticity to various spatial weight matrices as well as allowing for the endogeneity of unemployment. We also estimate the wage elasticity for various population groups.     

The role of the wage-productivity gap in economic activity

This paper argues that wages lagging behind productivity is a long-run structural phenomenon due to the interplay of wage dynamics and productivity growth. We call this interplay frictional growth, a term that can only be nullified in the utopian case of zero growth and/or no dynamics. In that vein, we challenge the prevailing view of the neutrality of the labour income share and investigate its impact on the evolution of employment. We thus estimate wage setting and labour demand equation systems – for France, Germany, Italy, Japan, Spain, the UK, and the US over the 1960–2008 period – and find that the labour share is negatively associated with employment even when the conventional assumption of a unitary long-run elasticity of wages with respect to productivity holds. Acknowledging the presence of the wage-productivity gap in both the short and long run, this work stands as the building block for assessing the effect of the falling labour share on economic activity. As recent work has shown that the widening wage gap is also an important factor prompting inequality, it can be argued that by supporting employment the falling labour share ‘sweetens’ the impact of rising income inequality, and, as such, deserves the attention of policy makers.     

Wage Determination In Australia*

This paper examines whether a stable expectations-augmented Phillips curve exists for Australia. High real wages in the face of continuing high unemployment over the past decade have led to suggestions that the level of unemployment has little effect on wage determination, with the bargaining process taking place between employers and those employees in ‘secure employment’. Results from aggregate data suggest that the level of unemployment is relevant to wage determination. In addition, the impact of overtime on the growth in money wages is consistent with the view that those in secure employment are influenced by labour market conditions.