Steinar Holden

A letter to the editor on wage bargaining

Abstract The Rubinstein perfect information alternating offers bargaining model is problematic when applied to wage negotiations. A strike or any other industrial action is not an automatic consequence of a delay in reaching an agreement, because production can continue normally also when negotiations take place. This paper extends the Rubinstein model to incorporate the choice of calling a strike, and it is shown that in this model there is no longer a unique subgame perfect equilibrium, and that strikes with a length in real time can occur in equilibrium.

Downward Nominal Wage Rigidity in the OECD

Recent microeconomic studies have documented extensive downward nominal wage rigidity (DNWR) for job stayers in many OECD countries, but critics argue that the effect might be undone by compositional changes and flexibility in wages of new entrants. Using data for hourly nominal wages at industry level, we explore the existence of DNWR on industry wages in 19 OECD countries, over the period 1973-1999. We propose a novel method to detect DNWR. We reject the hypothesis of no DNWR in the overall sample. The fraction of wage cuts prevented due to DNWR has fallen over time, from 61 percent in the 1970s to 16 percent in the late 1990s, but the number of industries affected by DNWR has increased. DNWR is more prevalent when unemployment is low and union density is high. Strict employment protection legislation also leads to fewer wage cuts.

Wage bargaining and nominal rigidities

Abstract Delays in wage negotiations do not necessarily mean work stoppage. Production can continue under the terms of the old contract while the parties are bargaining (holdout). This holdout option is included in a strategic bargaining game in addition to strike and lock-out threats Integrating the bargaining model in a standard macroeconomic framework, it turns out that holdout threats will prevail under certain circumstances. In this case wages will be rigid in nominal terms, so that an increase in aggregate nominal demand increases aggregate output.

WAGE DRIFT AND BARGAINING: EVIDENCE FROM NORWAY

Empirical equations, based on a theoretical bargaining model, are estimated on data for wage drift in six industries and in the aggregate manufacturing sector in Norway. It is shown that the central wage settlement has a strong impact on aggregate and relative wages in the short run, and that this effect is not offset by wage drift. Wage drift is also found to depend negatively on the size of inventories. This is interpreted as arising from the effect of the initial size of the inventories on the cost to the firm of an industrial conflict. Copyright 1989 by The London School of Economics and Political Science.

Wage Drift and the Relevance of Centralised Wage Setting

The system of wage setting in the Nordic countries is often regarded as highly centralised, contributing to considerable real wage flexibility. This view has been questioned, as the sizeable wage drift may offset the effect of the central negociations. This paper presents evidence from the four major Nordic countries, suggesting that there is no or little such offsetting effect. Yet the institutional system of wage formation may induce nominal rigidities at the central negociations, that may prevent wage restraint when there is little room for money wage growth.

Wage Formation under Low Inflation

This paper reviews the literature on the effects of low steady-state inflation on wage formation, focusing on four different effects. First, under low inflation, downward nominal wage rigidity (DNWR) may prevent real wage cuts that would have happened had inflation been higher. Second, wages (and prices) are given in nominal contracts, and inflation affects both how often wages are adjusted, and to what extent wages are set in a forward-looking manner. Third, incomplete labour contracts may provide workers with scope for inflicting costs on the firm without violating the contract, thus forcing the firm to accept a rise in nominal wages. Fourth, if effort depends on wages relative to a reference level, and workers and firms underweight inflation when updating the reference level, positive but moderate inflation may reduce wage pressure. The paper ends by a brief survey of empirical evidence, and a discussion of whether labour markets may adapt to a low inflation environment.

Measuring Structural Unemployment: NAWRU Estimates in the Nordic Countries

The non-accelerating wage rate of unemployment (NAWRU indicator), used by the OECD as a measure of structural unemployment, has risen for the four Nordic countries Denmark, Finland, Norway and Sweden. In this paper we present stable empirical wage equations for the same countries over the period 1964-1994, in sharp contrast to the increased NAWRU estimates. The instability of the NAWRU estimates is an artefact of a misspecified underlying wage equation, and not due to instability in wage setting itself.

Renegotiation and the Efficiency of Investments

In a long-term relationship between two parties, one partys threat of a unilateral violation of an initial contract may induce a renegotiation of the contract. As a renegotiation may result in one party capturing some of the return from the others investments, this possibility may lead to underinvestment. I show that if there is uncertainty associated with the outcome of a renegotiation, and if players are risk averse, there will be an interval for the initial contract so that it is not renegotiated. By an appropriate choice of the initial contract, underinvestment can thus be avoided.

Local and Central Wage Bargaining

The literature on wage bargaining usually considers either central or local wage bargaining; an exception is Holmlund (1986). Throughout most of the unionized part of the private sector in Norway, wage bargaining takes place on two levels, first centrally and then locally. In the economic policy debate, it has been argued that this system leads to higher wages and lower employment than bargaining on only one level, regardless of whether it is central or local; see e.g. Skatnland (1983). In this paper, I present a model with wage bargaining on two levels and show that, in this system, the above argument is proved false. We focus on an industry with n identical firms which produce one homogeneous product. For simplicity, the output price and input prices other than wages are considered given. On the central level, there is a utility-maximizing labor union with a quasi-concave utility function increasing in the arguments employment (L) and total wage ( VV). There is a local labor union in each firm. We analyze the system during one period, say a year. Wage setting in this period consists of three stages. In the first stage the central labor union sets the tariff wage q unilaterally. This follows the monopoly model of e.g. Dunlop (1944) and Oswald (1985). In the second stage the firms determine the employment L which prevails until the next period. In the third and final stage the local union negotiates with the management of the firm about local wage drift. The total wage is W= q + wage drift. The assumption that the firms determine employment prior to wage bargaining is used by e.g. Moene (1987) and Horn & Wolinsky (1985). Both the central labor union and the firms know how local wage bargaining functions and can therefore perfectly anticipate what the result-

Inflation Persistence and Relative Contracting

Macroeconomists have for some time been aware that the New Keynesian Phillips curve, though highly popular in the literature, cannot explain the persistence observed in actual inflation. We argue that one of the more prominent alternative formulations, the Fuhrer and Moore (1995) relative contracting model, is highly problematic. Fuhrer and Moores 1995 formulation generates inflation persistence, but this is a consequence of their assuming that workers care about the past real wages of other workers. Making the more reasonable assumption that workers care about the current real wages of other workers, one obtains the standard formulation with no inflation persistence.