INSIDER-OUTSIDER EFFECTS IN WAGE FORMATION: AN EMPIRICAL SURVEY*

The paper provides a review of empirical work on insider-outsider and duration effects in wage formation. It presents a theoretical model to investigate the relationship between previous employment and the wage rate. The impact of unemployment and long-term unemployment is considered. Empirical results show that the effect of previous employment on the wage rate is generally insignificant. Both short-term and long-term unemployment appear to have a significant negative impact. Micro-studies reveal that both firm-specific and aggregate variables play a role in wage determination.     

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.     

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.     

Insiders and outsiders in wage formation: The dutch case

In this paper the relevance of the insider-outsider theory is investigated for the Netherlands. Estimation results of a macro wage equation show that the insider-outsider distinction has some empirical relevance, because the lay-off rate has a significant negative influence on wages. However, the extreme insider-outsider model is rejected, because wages are also found to be significantly negatively related to the rate of long-term unemployment.     

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.     

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.     

Public policy,footloose capital,and union influence

This document sets up a unionized general oligopolistic equilibrium model of countries, where capital is footloose and governments maximize utilitarian welfare. When capital owners have weak influence on public policy, there is unemployment and the governments compete for jobs, causing a distortion with suboptimal wages. Then globalization—as characterized by a decrease in impediments to international investment—increases the wage elasticity of capital flight, decreasing wages and increasing employment. This benefits the capital owners and the unemployed workers getting a job, but harms the other workers. International coordination of public policy alleviates these consequences of globalization.     

Involuntary unemployment,macroeconomic policy,and a behavioral model of the firm: Why high real wages need not cause high unemployment

The perspective of modern macroeconomic theory, be it new classical or old and new Keynesian, is that unemployment can be reduced only if real wages are cut. The modern Keynesians, basing themselves upon the microfoundations of efficiency wage theory, argue that real wages cannot and will not be cut by firms for efficiency wage reasons. This generates involuntary unemployment based on a market coordination problem. A behavioral model that contrasts with efficiency wage theory is presented here which suggests that reducing real wages need not affect the marginal cost of labor and, therefore, the number of individuals employed. In the behavioral model, wherein there exists some linearity in the relationship between real wages and working conditions and labor productivity, a lower real wage rate is not a necessary condition for reducing the unemployment rate nor is a higher real wage an obstacle to reducing it. In this scenario, unemployment, to the extent that it is demand-side induced, is not related to movements in real wages. Therefore, restoring full employment after a negative demand shock becomes a matter for demand management, not demand management that must be coordinated with measures designed to reduce real wages.     

International fragmentation: Boon or bane for domestic employment?

In this paper, we introduce the fairness approach to efficiency wages into a standard model of international fragmentation. This gives us a theoretical framework in which wage inequality and unemployment rates are co-determined and therefore the public concern can be addressed that international fragmentation and outsourcing to low wage countries lead to domestic job-losses. We develop a novel diagrammatic tool to illustrate the main labour market effects of international fragmentation. We also explore how preferences for fair wages and the size of unemployment benefits govern the employment effects of outsourcing and critically assess the role of political intervention that aims to reduce unemployment benefits under internationally fragmented production.     

Migration and imperfect labor markets: Theory and cross-country evidence from Denmark,Germany and the UK

We investigate the labor market effects of immigration in Denmark, Germany and the UK, three countries which are characterized by considerable differences in labor market institutions and welfare states. Institutions such as collective bargaining, minimum wages, employment protection and unemployment benefits affect the way in which wages respond to labor supply shocks, and, hence, the labor market effects of immigration. We employ a wage-setting approach which assumes that wages decline with the unemployment rate, albeit imperfectly. We find that the wage and employment effects of immigration depend on wage flexibility and the composition of the labor supply shock. In Germany immigration involves only moderate wage, but large unemployment effects, since immigrants are concentrated in labor market segments with low wage flexibility. The reverse is true for the UK and Denmark.     

What goes up sometimes stays up: shocks and institutions as determinants of unemployment persistence

We analyse the determinants of unemployment persistence in four OECD countries by estimating a structural Bayesian VAR with an informative prior based on an insiders/outsiders model. We explicitly insert unemployment benefits and labour taxes so that our identification is not affected by the Faust and Leeper (1997) critique. We find widespread hysteresis: demand shocks play a dominant role in explaining unemployment also in the medium‐run. Moreover real wages have low sensitivity to cyclical fluctuations and to labour market disequilibria. Our results emphasise the real power of the unions and their interactions with structural shocks and other institutions as crucial determinants of hysteresis.     

THE EFFECTS OF TAXES ON LABOUR IN A DYNAMIC EFFICIENCY WAGE MODEL*

This paper studies the impact of wage and employment taxes in an intertemporal efficiency wage model. Cases with fixed, linear and quadratic adjustment costs associated with job creation are considered. In general, the model shows that an increase in the employment tax leads to an increase in unemployment, reducing job creation, and has ambiguous effect on wages; whereas an increase in the wage tax reduces wages and has ambiguous impact on unemployment and job creation.     

The Welfare and Employment Effects of Centralized Public Sector Wage Bargaining

In many countries, the government pays almost identical nominal wages to workers living in regions with notable economic disparities. By developing a two‐region general equilibrium model with endogenous migration and search frictions in the labor market, I study the differences in terms of unemployment, real wages, and welfare between a regional wage bargaining process and a national one in the public sector. Adopting the latter makes residents in the poorer region better off and residents of the richer region worse off. Private sector employment decreases in the poorer region and it increases in the richer one. Under some conditions, the unemployment rate in the poorer region soars.     

Relative Price Changes, Wages and Unemployment in a Specific Factors Model with Search Frictions

This paper analyzes the effects of changes in the relative product price on wages and unemployment of a small open economy in a specific factors model characterized by search frictions. It shows that unemployment and wages move in opposite directions, i.e., high unemployment is associated with low wages and low unemployment with high wages. The reason for the employment effect is found to be individual wage bargaining.     

Unemployment insurance and union bargaining — an insider-outsider approach

A trade union is required to tax its own members to fund unemployment benefit paid to its unemployed members in an insider-outsider model of union bargaining over wages and employment. An increase in unemployment benefit imposed by the government increases employment overall but not necessarily the employment of insiders if the tax rate is exogenously fixed by the government.This paper has benefited from comments of Mick Common, Dipak Ghosh, Bob Hart, and Robin Ruffell. The comments of two anonymous referees and the advice of the Editor have greatly improved the presentation of the paper. Any remaining errors or omissions are the responsibility of the authors.     

Explaining Eastern Germany's Wage Gap: The Impact of Structural Change

Since Eastern Germany's conversion to a market economy wages have remained considerably below the West German wage level. This article looks at the role of establishment-specific factors—such as sectoral affiliation and size of the labour force—in this process. A non-parametric decomposition that has played a prominent role in the gender wage gap literature is applied to breakdown the East–West wage gap into its constituent components. Using establishment data from German employment statistics, the article demonstrates that the catching-up process of Eastern Germany's wage level is hindered by the shift in its economic structure towards lower-paying types of companies, which has caused the lagging behind in the adjustment of wages.     

Conflict in the labor market: Seniority rules and unemployment

This paper examines the macroeconomic implications of two labor-market institutions that play an important role in worker-management interactions: seniority-based layoffs and majority voting on wage proposals. Together, these make the median worker, rather than the marginal worker, the important decision maker for wage and employment outcomes. Since he is risk-averse, he will trade off higher wages for greater security of employment; therefore, the equilibrium level of unemployment will be much less than 50%, but higher than the conventional natural rate of unemployment. Median-worker behavior helps to explain both the greater frequency of excess supply than excess demand (59.4% versus 40.6% of the time since 1890) and the wage concessions of 1981–1983. A new Phillips curve is derived which incorporates systematic influences of the size of the labor force (to correct for the inappropriate measure of excess supply) and Tobin's “q” variable (to measure the risk of unemployment for the median worker). With U.S. data for 1957–1983, this new Phillips curve has a higher explanatory power than the traditional one. Additional forces that influence wages and employment in this setting are identified: firms have an incentive to bargain actively over wages rather than accept union demands passively and senior workers have a “social contract” with junior workers that reduces the extent to which the former exploit the latter.     

Unemployment Benefits, Contract Length and Nominal Wage Flexibility

In a bargaining model, we show that a decrease in the unemployment benefit level increases not only equilibrium employment, but also nominal wage flexibility, and thus reduces employment variations in the case of nominal shocks. Long‐term wage contracts lead to higher expected real wages and hence higher expected unemployment than short‐term contracts. Therefore, a decrease in the benefit level reduces the expected utility gross of contract costs of a union member more with long‐term than with short‐term contracts, thereby creating an incentive for shorter contracts. Incentives for employers are shown to change in the same direction.     

Fair wages in a New Keynesian model of the business cycle

We build a New Keynesian model of the business cycle with sticky prices and real wage rigidities motivated by efficiency wages of the gift exchange variety. Compared to a standard sticky price model, our Fair Wage model provides an explanation for structural unemployment and generates more plausible labor market dynamics—notably accounting for the low correlation between wages and employment. The fair wage induced real wage rigidity also significantly reduces the elasticity of marginal cost with respect to output. The smoother dynamics of real marginal cost increase both amplification and persistence of output responses to monetary shocks, thus remedying the well-known lack of internal propagation of standard sticky price models. We take these improvements as a strong endorsement of the addition of real wage rigidities to nominal price rigidities and conclude that the fair wage extension of this paper constitutes a promising platform for an enriched New Keynesian synthesis.     

Coordination versus flexibility in wage formation: a focus on the nominal wage impact of productivity in Germany,Greece, Ireland,Portugal, Spain and the United States

Wage coordination between countries of the European Monetary Union (EMU) aims at aligning nominal wage growth with labour productivity growth at the national level. We analyse the developments in Germany, the EMU’s periphery countries Greece, Ireland, Portugal and Spain along with the United States over the period 1980 to 2010. Apart from the contribution of productivity to nominal wages, we take into account the contributions of prices, unemployment, replacement rates and taxes by means of an econometrically estimated nonlinear equation resulting from a wage bargaining model. We further study the downward rigidities of nominal wages. The findings show that in past times of low productivity, price inflation and reductions in unemployment still put significant upward pressure on nominal wage growth. The periphery countries are far from aligning nominal wage growth with productivity growth. German productivity is a major wage determinant, but surely not the only one. Within the context of a free bargaining process between employers and labour unions, policy-makers can effectively use the replacement rate to steer the nominal wages outcome.