Frictional wage dispersion with Bertrand competition: An assessment

I examine whether a version of the Cahuc et al. (2006) model can match the magnitude of wage dispersion, as measured by the ratio of the average and the lowest wage — the so-called mean-min ratio of Hornstein et al. (2011). I find that the workers? bargaining power is a crucial parameter: the mean-min ratio strictly decreases in the bargaining power up to a point near 1/2 and is essentially flat thereafter, generating the same amount of wage dispersion as the canonical wage ladder model, which is a special case of the CPVR model. Consequently, this model can yield large wage dispersion only for low bargaining power on the workers? side. I show that the share of job-to-job transitions with wage drops is decreasing in the bargaining power, calibrate the latter to the former, and demonstrate that the CPVR model generates an empirically plausible amount of wage dispersion. I also show that negative wages arise when workers have no bargaining power, and discuss the implications for the empirical findings of Postel-Vinay and Robin (2002b).     

On-the-job search and strategic bargaining

This paper studies wage bargaining in a simple economy in which both employed and unemployed workers search for better jobs. The axiomatic Nash bargaining solution and standard strategic bargaining solutions are inapplicable because the set of feasible payoffs is nonconvex. I instead develop a strategic model of wage bargaining between a single worker and firm that is applicable to such an environment. I show that if workers and firms are homogeneous, there are market equilibria with a continuous wage distribution in which identical firms bargain to different wages, each of which is a subgame perfect equilibrium of the bargaining game. If firms are heterogeneous, I characterize market equilibria in which more productive firms pay higher wages. I compare the quantitative predictions of this model with Burdett and Mortensen's [1998. Wage differentials, employer size and unemployment. International Economic Review 39, 257-273.] wage posting model and argue that the bargaining model is theoretically more appealing along important dimensions.     

Pattern Bargaining and Wage Leadership in a Small Open Economy*

Pattern bargaining with the tradables (manufacturing) sector as the wage leader is common in Europe. We question the conventional wisdom that such bargaining produces wage restraint. In our model, all forms of pattern bargaining give the same outcomes as uncoordinated bargaining under inflation targeting. Under a monetary union, wage leadership for the non‐tradables sector is conducive to wage restraint, whereas wage leadership for the tradables sector is not. Comparison thinking might lead the follower to set the same wage as the leader. Such equilibria can arise when the leader sector is the smaller sector, and these can promote high employment.     

Union–firm bargaining: Order of play and efficiency

This paper shows that a modified alternating offers Rubinstein model can provide a Pareto superior outcome in the context of the right-to-manage union–firm bargaining. Two examples of bargaining protocols that yield a superior outcome are provided. In the first example, the parties engage in a game in which the order of play is determined as part of the bargaining. We show that the game has a unique subgame perfect equilibrium in which the firm always moves first in the wage bargaining game. The equilibrium wage is, therefore, unique. In the second example, we examine a two-part-tariff alternating offers bargaining protocol, where the parties bargain over the wage and transfer payments. We show that this bargaining protocol has a Pareto efficient, unique subgame perfect equilibrium. Thus, although the parties do not bargain over the level of employment, the outcome under this protocol is, nevertheless, socially optimal.     

Unions and the share economy

This paper contrasts share bargaining and wage bargaining in the context of a “monopoly” model of union bargaining. In the example considered here, employment levels are identical under wage and share systems, but total compensation is higher under share bargaining than under wage bargaining, underscoring the importance of the broader ontext within which a share system is introduced.     

Wage restraint and monetary union

Existing work on wage bargaining predicts more aggressive wage setting under monetary union. This is exemplified by Cukierman and Lippi (2001) who postulate that wages are set having area-wide prices in mind. The insight of aggressive wage behaviour has not been confirmed by the EMU experience, which has been characterised by wage moderation. The present paper investigates the possibility of wage restraint using a monetary union model which, realistically, assumes that trade unions set wages with national prices in mind. Drawing on plausible ranges for all parameter values (and macroeconomic shocks), our simulations show that a monetary union elicits real wages that are broadly comparable to those obtained under monetary autonomy. The confidence bounds around these results are rather wide, in particular including scenarios of wage restraint.     

Bargaining structure and nominal wage flexibility

In a model with wage setting by monopoly unions and monetary policy conducted by a central bank, the duration of nominal wage contracts is shown to be u-shaped in the degree of centralization, with intermediate bargaining systems yielding contracts of shorter duration and thus, more flexible nominal wages than both decentralized and centralized systems. The theoretical predictions of the model are tested on OECD data, and there is empirical support for the main results on contract length.     

NOMINAL WAGE INDEXATION,QUASI‐EQUILIBRIA AND REAL WAGE DYNAMICS

In contrast to the traditional static approach to indexation, this paper analyses the dynamic consequences for real wages of the mechanism that links nominal wages to inflation. Revisiting a contribution by Dehez and Fitoussi on macroeconomic fluctuations , I analyse a monetary overlapping generations small open economy in which full indexation is interpreted as the occurrence of a dynamic ‘quasi‐equilibrium’. In the suggested framework, the nominal wage is linked to the inflation rate by a specific indexation formula whose shape relies on unions' bargaining positions. Assuming a constant peg for the real interest rate and the superneutrality of money, I show that the economy has a unique long‐run quasi‐equilibrium allocation whose stability depends only on the behaviour of the monetary authority. Moreover, I show how the operating of a ‘wage‐aspiration effect’ might lead to the persistence of involuntary unemployment.     

The Interplay of Wage and Exchange Rate Policies in Singapore: A Case of Collective Bargaining in Macroeconomic Management

This article analyzes an optimization model of the policy game between Singapore's National Wage Council and the Monetary Authority of Singapore and further simulates the model over policy rules (Nash game versus non-Nash game), economic scenarios, and the game players' preference and bargaining power. The results indicate that the exchange rate appreciation and wage growth act as substitutes under the Nash rule of policy responses, whereas they act as complements under the non-Nash rule. Under the Nash rule, the exchange rate appreciation tends to be procyclical and wage growth countercyclical; union workers' bargaining power relative to employers' strengthens the procyclical appreciation uniformly but reinforces the countercyclical wage growth only when the economy undergoes a downturn. Both the Nash and non-Nash rules call for more moderate appreciation and more flexible wage adjustments than their actual movements. (JEL E64 , E61 , F41 )     

WAGE BARGAINING WITH A PRICE-SETTING FIRM

This paper examines the introduction of monopolistic competition into wage bargaining models: in addition to capital-labour substitution, we also consider a cost-push effect. The right-to-manage model requires strong restrictions on the objective functions and leads to problematic conclusions because the wage claims of the union are generally not compatible with the mark-up requirement contained in the firm's price equation. In the efficient bargaining model, the union negotiates also the employment level, which gives it a way of extracting part of the monopoly rent: the firm's commitment to an efficient wage-employment combination forces it to follow a pricing rule such that part of the surplus is transferred to the union.     

Trade and unions: Does size matter?

Our empirical analysis builds upon the hypothesis that unions are detrimental to a firm's efficiency. Using a rich survey of German manufacturers, we investigate firm-level determinants on the probability of collective wage bargaining with particular focus on the impact of a firm's engagement in foreign markets. An interesting and very robust finding is that exporters are less likely to engage in union wage bargaining. This finding is in line with a pessimistic perception of unions. The negative effect of collective bargaining can be offset by efficiency gains for larger exporters, who can benefit from operation cost saving effects. Size does matter as larger firms export and may find bargaining with a single entity representing the workforce more convenient than bargaining with each worker individually. We are using firm level information on IT investment as instrument for the export dummy and successfully test for the validity of this instrument.     

The role of labor markets for euro area monetary policy

In this paper, we explore the role of labor markets for monetary policy in the euro area in a New Keynesian model in which labor markets are characterized by search and matching frictions. We first investigate to which extent a more flexible labor market would alter the business cycle behavior and the transmission of monetary policy. We find that while a lower degree of wage rigidity makes monetary policy more effective, i.e. a monetary policy shock transmits faster onto inflation, the importance of other labor market rigidities for the transmission of shocks is rather limited. Second, having estimated the model by Bayesian techniques we analyze to which extent labor market shocks, such as disturbances in the vacancy posting process, shocks to the separation rate and variations in bargaining power are important determinants of business cycle fluctuations. Our results point primarily towards disturbances in the bargaining process as a significant contributor to inflation and output fluctuations. In sum, the paper supports current central bank practice which appears to put considerable effort into monitoring euro area wage dynamics and which appears to treat some of the other labor market information as less important for monetary policy.     

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

In order to reduce unemployment, it is often recommended that industry-level wage bargaining in Germany should be replaced by a more decentralized system. This paper provides a critical assessment of the current wage bargaining institutions and re-examines the case for a more decentralized system. Based on a theoretical model integrating Insider–Outsider aspects into the comparison, the uniformly 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.     

Investment and technological choice in a right-to-manage model

We analyze the interactions between investment and local wage bargaining in a putty-clay model where the investment decision commits the firm to a particular capital intensity. This technological precommitment is used strategically in order to manipulate the bargaining outcome. We show that this strategic behavior induces a nonmonotonic relationship between the capital and labor demands of the firm and most of its environmental parameters (e.g., the bargaining power of the union, its minimum wage requirement, the capital cost). The results we obtain in our putty-clay framework thus contradict several conclusions of the standard literature on wage bargaining and investment.     

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.     

Wage Bargaining Versus Efficiency Wages: A Synthesis

We construct a model integrating the efficiency wage model of Shapiro–Stiglitz (1984) (SS), with an individual wage bargaining model in the Diamond–Mortensen–Pissarides (DMP) tradition where firms and workers form pairwise matches. We show that when workers may threaten to shirk on the job and there is individual wage bargaining, the wage is always higher and employment lower than in either the SS model, or the (appropriately modified) DMP model. When firms determine workers' efforts unilaterally, efforts are set inefficiently low in the SS model. In the bargaining model, effort is higher, and is first best when the worker non–shirking constraint does not bind. The overall equilibrium allocation may then be more or less efficient than in the SS model, but is always less efficient than in a pure bargaining model with no moral hazard.     

Insiders and outsiders in labour market models

The monopoly union model and the wage bargaining model are analysed in light of the distinction between insiders and outsiders. It is shown that a possible outcome of the wage bargaining is the wage level where all insiders keep their job, but no outsiders are taken on. In this situation, small variations in the bargaining situation of the union will not affect the wage and employment outcome. Furthermore, it may even be the case that the union does not wish a higher wage, because this would lead to lay-offs among the insiders. Thus, the monopoly union model and the bargaining model may yield the same wage and employment levels.This paper is part of the research project Wage Formation and Unemployment at SAF Center for Applied Research at the Department of Economics, University of Oslo. Comments from Michael Hoel, Andrew Oswald, Åsa Rosén, Asbjørn Rødseth and an anonymous referee on earlier drafts are gratefully acknowledged.     

Optimal contracts and the role of the government in wage bargaining

This paper introduces a contract between the government and trade unions in a model of strategic wage bargaining à la Lippi (2003). It shows that an optimal contract can be implemented through an appropriately defined inflation target.     

State-dependent fiscal multipliers in NORA - A DSGE model for fiscal policy analysis in Norway

We develop a novel medium-scale DSGE model, called NORA, for fiscal policy analysis in Norway. NORA contains a sheltered and exposed sector allowing us to model wage bargaining between a labor union and the exposed sector, reflecting Scandinavian wage formation institutions. Wages are subject to a downward nominal wage rigidity (DNWR). Inspired by many countries' fiscal policy responses to the Great Recession and the coronavirus pandemic, we investigate the model's ability to generate state-dependent fiscal multipliers. We find, that both the zero lower bound on nominal interest rates and DNWR individually can account for higher fiscal multipliers during recessions. In joint presence, however, the existence of DNWR reduces the multiplier at the ZLB. Moreover, the DNWR significantly relaxes the paradox of toil at the ZLB. We show that the state-dependency is robust to alternative assumptions about the origin of the recession, the nature of the fiscal stimulus and its financing source.     

Wage bargaining and vertical differentiation

This paper applies the Nash Bargaining solution to wage setting in a vertically differentiated oligopoly and studies its welfare effects. The market outcome crucially depends on the bargaining power attributed to the agents. I show that the wage bargaining structure is likely to lead to another source of inefficiency that adds to the classical one derived by oligopoly pricing and quality choice. (JEL: L11, J51)