Share contracts and macroeconomic externalities

Weitzman's analysis of the share economy contrasts fixed-wage and fixed-share contracts; this paper notes that neither is an optimal labor contract, rendering the comparison suspect. Given this comparison, though, share contracts may be superior to wage contracts in an economy characterized by a “macroeconomic externality,” whereby firm-level employment decisions affect the demand for other firms' goods.     

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'.     

Is Japan really a share economy?

Weitzman claims that Japan is a “living laboratory” for the share economy. This paper examines that proposition and concludes that Japanese bonuses are better interpreted as disguised wage payments than as profit shares. Other institutional features of the Japanese labor market provide more likely explanations of that economy's performance.     

Inflation and unemployment in the share economy

This note first interprets Weitzman's monopolistic competition analogy to the share economy and considers the implications of this for the nature of “excess demand” in such an economy. The discussion then focuses on the effects of the real wage flexibility induced by sharing schemes. It is observed that Weitzman's analysis is entirely in terms of real, not nominal, variables. The note concludes with remarks on possible distributional conflicts in a share economy.     

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).     

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.     

Multiple Wage Bargaining Systems in the Single European Currency Area

Little attention in the EMU literature has been paid to the interaction between centralbank monetary rules and systems of collective wage bargaining. Analytically andempirically, coordinated wage bargaining systems respond with real wage restraintto non-accommodating monetary policy. Since wage determination is dominated bycollective bargaining in all the EMU member states and wage coordination within themember states has grown since 1980, this is a topic of potential importance. In particular, the replacement of the Bundesbank, directly targeting German inflation, by an ECB targeting European inflation has removed a major institutional support of wage restraint in Germany. The consequences of this for EMU are worked out under two scenarios, that inflation expectations will be generated by ECB monetary policy and that they will reflect German inflation outcomes. Possible institutional developments are discussed including government-union bargains. The Bundesbank has also played a major role in maintaining fiscal rectitude by targeting excess fiscal deficits in Germany: again its replacement by the ECB – targeting (if at all) European rather than German fiscal policy – loosens fiscal constraints. For underlying structural reasons therefore, it is possible that Germany and other EMU countries will move to a period of fiscal activism with wage restraint and low inflation purchased through social contract negotiations.     

Bargaining Outcomes with Double-Offer Arbitration

Increasingly, arbitration is becoming used to resolve bargaining disputes in a variety of settings. Reducing dispute rates is often listed as a main goal in designing arbitration mechanisms. Conventional arbitration and final-offer arbitration are two commonly used procedures, but theoretical examinations of these arbitration procedures show that disputants’ final bargaining positions do not converge and disagreement is likely. This article contains results from a set of experiments designed to compare bargaining outcomes under the two commonly used arbitration procedures with outcomes under an innovative procedure called “double-offer” arbitration (Zeng et al., 1996). This procedure requires that disputants make two final offers at impasse: a primary and a secondary offer. The arbitrator evaluates the pairs of offers using a linear criterion function, and theory suggests the secondary offers converge to the median of the arbitrator’s preferred settlement distribution. Because the procedure’s rules are that convergence of offers generates a settlement at those offers, this theoretical convergence result implies that arbitration is not needed in the end. Experimental results indicate that dispute rates in double-offer arbitration are, on average, about the same as dispute rates in conventional arbitration. However, other results show reason to favor double-offer arbitration. Specifically, in repeated bargaining, there is concern over whether use of an arbitration procedure becomes addictive and makes bargainers more likely to use the procedure in the future-a “narcotic effect.” The data show that double-offer arbitration is non-addictive, whereas both conventional and final-offer arbitration are.     

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.     

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.     

INFORMATION SHARING IN UNION–FIRM RELATIONSHIPS*

Large firms often negotiate wage rates with labor unions. When they do, an ex ante agreement to share information should make it more likely that they will reach an agreement and capture the gains from trade. However, if the firm refuses to share information, the union may shade down its wage demand to increase the probability of acceptance. This reduction in the wage can increase the joint surplus of the agents and increase social welfare. As a result, there are some circumstances in which bargaining with incomplete information can be better for the agents and society than bargaining with complete information.     

Growth cycles and inflation in a model of the class struggle

The problems of price and wage inflation and unemployment are discussed here in a context of a model of class struggle developed by R. M. Goodwin. The basic Goodwin model which is an analog of the Volterra-Lotka preypredator model is extended to include actual and anticipated price inflation and excess capacity. Cyclical behavior of labor's share in national income and the employment ratio is studied around a Harrodian steady state. It is found that the presence of money illusion with respect to the actual rate of inflation in the wage bargaining equation is a stabilizing influence. With respect to anticipated inflation, local stability of equilibrium is no longer assured. The implications of this for Phillips curve analysis are also derived.     

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.     

Insider Bargaining Power, Starting Wages and Involuntary Unemployment

Recent studies of wage bargaining and unemployment have emphasized the distinction between insiders and outsiders, and that unions act in the interest of insiders. Yet it is typically assumed that insiders and recently hired outsiders are paid the same wage. We consider a model where the starting wage may differ from the insider wage, but incentive constraints associated with turnover affect the form of the contract. We examine under what conditions the starting wage is linked to the insider wage so that increased bargaining power of insiders raises the starting wage and reduces the hiring of outsiders.
JEL classification : J 23; J 31; J 33     

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.     

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.     

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.     

The effect of labor market monopsony on economic growth

In this endogenous growth model, a minimum efficient scale of production and workers’ home-to-work travel costs combine to give firms monopsony power, and this monopsony power leads to slower growth. Monopsony drives the wage below the marginal product of labor. This lower wage leads to lower investment in human capital and thereby to a lower growth rate. This makes investment in human capital – and therefore the growth rate – suboptimal. We provide evidence from a cross-country panel to support our model: Urbanization, which we assume is determined by a country’s exogenous population density and cropland area, positively impacts the wage share of output; the wage share positively impacts educational attainment; higher-income countries have higher wage shares; and within-country upticks in the wage share have a positive lagged effect on the growth rate.     

The codetermined firm in a Cournot duopoly: A stability analysis

This paper aims to study the stability issue in a Cournot duopoly with codetermined firms. We show that when both firms codetermine employment together with decentralised employees' representatives, a rise in wages acts as an economic (de)stabiliser when the wage is fairly (high) low, while under profit maximisation a rise in wages always acts as a stabilising device because the parametric stability region monotonically increases with the wage in such a case. Moreover, a rise in the union's bargaining power has a de-stabilising effect, except when the wage is low and the firm power is already high. Therefore, under codetermination a change either in the wage or firm power in the Nash bargaining plays an ambiguous role on stability. We also show with numerical simulations that complex dynamics can also occur.     

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.