Offshoring and Reshoring: The Roles of Incomplete Contracts and Relative Bargaining Power

This paper demonstrates that an increase in bargaining power of Northern firms relative to that of their Southern contractors can trigger reshoring if the North-South wage differential is moderate, such that only industries with a high share of unskilled labor find outsourcing profitable. However, such an increase in Northern bargaining power can increase offshoring if the wage differential is so high that even industries with a low share of unskilled labor also offshore.     

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.     

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).     

Strategic union delegation and strike activity

Abstract.  We develop a model of wage determination with private information, in which the union has the option to delegate the wage bargaining to either surplus‐maximizing delegates or to wage‐maximizing delegates (such as senior union members). We show that the wage outcome in case of surplus‐maximizing delegates is not necessarily smaller than the wage outcome in case of wage‐maximizing delegates, even when the wage bargaining with private information is close to one with complete information. However, if it is commonly known that the union is stronger than the firm and the demand is sufficiently elastic, then delegating to wage‐maximizing delegates definitely increases the wage at equilibrium. The maximum delay in reaching an agreement is greater whenever the union chooses wage‐maximizing delegates instead of surplus‐maximizing delegates and remains finite even when the period length shrinks to zero. JEL classification: C70, C71, C72, C78     

INDUSTRIAL RELATIONS AND ECONOMIC GROWTH IN KOREA

The wage rate, labour productivity, and labour share are examined as they relate to changing industrial relations over the last four decades in the Korea. The results imply that the labour share is greater than that of Korea's competitive equilibrium in the 1990s. We analyse the effect of industrial relations on economic growth through a theoretical model comparing the growth rate of the competitive equilibrium with that of the bargaining equilibrium. The bargaining growth rate is lower than that of the competitive equilibrium. Among bargaining equilibria, the growth rate decreases as the labour share increases.     

WAGE SIGNALING: A DYNAMIC MODEL OF INTRAFIRM BARGAINING AND ASYMMETRIC LEARNING*

The article analyzes the effect of employer–worker bargaining on wage dynamics in the presence of asymmetric information between current and potential employers. A failure to reach an agreement leads to output loss. Because the disagreement points depend upon the worker's productivity, productive workers separate themselves from less productive workers and signal their ability through wages. In existing models of asymmetric learning, wages are attached to publicly observable characteristics and wage growth occurs only when there is a change in observable characteristics. This model, in contrast, generates an increase in earnings dispersion in cohorts of workers with similar observable characteristics.     

Macroeconomic fluctuations and bargaining

I study the limit rule for bilateral bargaining when agents recognize that the aggregate economy (and thus the match surplus) follows a finite-state Poisson process. The rule derived in this paper is of special importance for decentralized exchange economies with bargaining. Two simple applications are presented to illustrate this fact. The first example is a model of wage bargaining and trade externalities. I show that in such situations sophisticated bargaining tends to increase the volatility of the wage bill. The second example is based on the Kiyotaki-Wright model of money. I explain how equilibrium prices depend in a fundamental way on the dynamic bargaining solution.     

A DISEQUILIBRIUM MODEL UNDER BILATERAL MONOPOLY*

The paper points out a crucial difference between the conventional disequilibrium macro model and partial equilibrium models of wage bargaining, In the former the real wage is constrained to be less than or equal to the marginal product, whereas in the latter the real wage is frequently constrained to be greater than or equal to the marginal product. The paper builds a disequilibrium model under bilateral monopoly, paying explicit attention to the labour market. The well-known union model of McDonald and Solow forms the basis of the labour market analysis. Just as the three regions of Keynesian Unemployment, Classical Unemployment and Repressed Inflation are configured in the conventional case, an equivalent exercise is undertaken but with the addition of a collectively negotiated wage. The particular wage agreement used is the Nash bargain. The framework is then used to account for the unusual events that occurred in the UK labour market 1979–81, particularly the unprecedented rise in unemployment with no diminution of the inflation rate. It suggests that there was a shift in bargaining advantage in favour of employers, which resulted in an increased share of profits in national income. This regime change exacerbated the unfavourable circumstances for labour, which existed at that time.     

Profit sharing as entry deterrence mechanism

In a right-to-manage framework, this paper analyzes the optimal choice of the pay scheme (profit sharing vs. fixed wage) in a unionized duopoly with potential market entry and decentralized bargaining. The paper shows that, depending on the institutional features, both pay systems can arise as equilibria in Nash strategies. Under duopoly with committed bargaining, the fixed wage is the Nash equilibrium; with flexible bargaining, an agreement between the incumbent firm and its union about profit sharing arises as Nash equilibrium, if the union is not too strong. A monopoly with threat of entry reinforces the selection of profit sharing as a deterrent mechanism.     

Efficiency wages and union-firm bargaining with private information

We consider efficiency wage effects in a union-firm bargaining model with private information. We show that an increase in the efficiency wage effects does not necessarily increase the wage level at equilibrium, even when the wage bargaining with private information is close to one with complete information. However, if it is commonly known that the firm is stronger than the union and the demand is sufficiently elastic, then an increase in the efficiency wage effects increases for sure the wage at equilibrium.JEL Classification: J41, J50, J52We thank Juan Dolado and two anonymous referees for valuable comments. Vincent Vannetelbosch is Chercheur Qualifié at the Fonds National de la Recherche Scientifique. The research of Ana Mauleon has been made possible by a fellowship of the Fonds Européen du Développement Economique Régional (FEDER). Financial support from the Belgian French Communitys program Action de Recherches Concertée 99/04-235 (IRES, Université catholique de Louvain) is gratefully acknowledged.     

Sharing the Burden? Empirical Evidence on Corporate Tax Incidence

This study investigates the direct incidence of the corporate income tax (CIT) through wage bargaining, using an industry‐region level panel dataset on all corporations in Germany over the period 1998–2006. For the first time we account for employment effects which result from tax‐induced wage changes. Workers share in reductions of the CIT burden; yet, the net effect of wage bargaining on the corporate wage bill, after an exogenous €1 decrease in the CIT burden, is as little as 19–28 cents. This is about half of the effect obtained in prior literature focussing on wages alone.     

Flexible and Committed Profit Sharing with Wage Bargaining: Implications for Equilibrium Unemployment

We analyze the relationship between profit sharing, employee effort, wage formation and unemployment under different relative timings of the wage and profit sharing decisions. The optimal profit share under commitment exceeds that under flexibility, because through a profit share commitment the firm can induce wage moderation. The negotiated profit sharing depends positively on the bargaining power of trade union and it has both effort-enhancing and wage-moderating effects. Higher profit sharing is shown to reduce equilibrium unemployment under ``sufficiently rigid' labor market institutions, but it can harm employment when labor market ``rigidities' are ``small enough'.     

Efficient taxation, wage bargaining and policy coordination

This paper is related to the literature on optimal nonlinear taxation under right-to-manage wage formation, and we assume that the fall-back profit facing firms during wage bargaining depends on the profit they can obtain if moving production abroad. The purpose is to study how policy coordination among countries can be used to increase the welfare level in comparison with an uncoordinated equilibrium. We consider coordinated policy reforms with respect to the marginal taxation of labor income, the unemployment benefit and the provision of a public good. The results show that policy coordination that leads to fewer hours of work per employee and/or a reduction of the unemployment benefit will increase welfare compared to the uncoordinated equilibrium.     

A real target model of wage inflation with variable union power: the UK experience 1962–1984

This paper offers a reassessment of the hypothesis that nominal wage determination involves Union real wage targets whose attainment depends on the bargaining process. The conventional model is augmented by the introduction of employer targets as well as nonlinear specification for relative power. Empirical evidence suggests that our estimates of Union power can partially explain share price fluctuations.     

Mixed wage and rent contracts as reinterpretations of share contracts

This note extends the result of Stiglitz (1974) and Newbery (1977) concerning the equivalence of mixed wage and rent contracts to share contracts to the case where the only assumption is that there are no enforcement or transaction costs. This is so because an equivalent mixed wage/rent agreement can always be obtained by simply reinterpreting a share agreement.     

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.     

Wage bargaining, labor-tax progression, and welfare

This paper analyzes the effect of labor-tax progression on employment and welfare in an economy with a unionized labor market. The government influences wage bargaining through its tax policies. Wages can be reduced by increasing the marginal labor-tax rate. If there are no restrictions on profit taxation, a first-best optimum with full employment is realized; this first-best optimum can always be implemented by a progressive tax schedule. If profit taxation is restricted, unemployment may arise. For this case, we show that the welfare-maximizing degree of tax progression is influenced by a variety of factors, in particular the wage elasticity of labor demand, the distribution of bargaining power, and the existence of unemployment benefits. Examples are given for both progressive and regressive tax structures. Comparative-static analysis reveals that a decline in union bargaining power, an increase in unemployment benefits, and an increase in the overall work force reduce the efficient degree of tax progression.     

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.     

Is it Harmful to Allow Partial Cooperation?

In economics, politics and society, examples abound in economics, politics and society where agents can enter partial cooperation schemes, i.e., they can collude with a subset of agents. Several contributions devoted to specific settings have claimed that such partial cooperation actually worsens welfare compared to the no-cooperation situation. Our paper assesses this view by highlighting the forces that lead to such results. We find that the nature of strategic spillovers is central to determining whether partial cooperation is bad. Our propositions are then applied to various examples as industry wage bargaining or local public goods.
JEL classification: C 72; E 62; J 5     

The influence of potential on wages and effort

We investigate how employee potential influences wage offers and effort exertion in a gift exchange experiment. In particular, we test if gift exchange based on a commonly accepted norm for wage differentiation can emerge in a setting where the wage demands of agents are heterogeneous. We also analyse how communication by principals responds to the unequal wage demands and how it influences agents’ decisions about working effort in the presence of varying degrees of bargaining power. We find that differences in productivity and the resulting entitlements lead to differentiation in wages. High productivity agents are offered substantially higher wages than low productivity agents. Results from a control experiment suggest that a large part of this wage markup is related to the future productivity potential of high performers. At the same time, unequal wage schemes do not substantially crowd out effort exertion: we observe no strong detrimental effects from disadvantageous relative wage positions. Certain communication patterns significantly influence effort exertion.