Wage Bargaining

Wage bargaining is the process by which wages and other conditions of employment are determined through negotiation between employers and workers, or their representatives. Wage bargaining is a central institution of the labour market, and its structure affects the level of wages and of employment.

Levels

Wage bargaining occurs at several levels. In firm-level bargaining, the negotiations take place between the employer and the representatives of the workers of the firm. In sectoral bargaining, the negotiations take place between the employers' associations and the trade unions of an industry.

In national bargaining, the negotiations take place at the level of the economy, often with the involvement of the government. The level of the bargaining affects the outcomes, including the wage differentials and the response of wages to the conditions of the economy.

Models of Bargaining

The analysis of wage bargaining uses the framework of bilateral monopoly, in which the employer and the workers negotiate over the wage. The outcome depends on the bargaining power of the parties and on the alternatives available to them.

The bargaining power of the workers depends on the level of unionisation, on the coverage of the agreements, and on the legal framework. The bargaining power of the employers depends on the availability of substitutes and on the conditions in the market.

The analysis of bargaining also considers the effect of the outcome on employment. A wage that is set above the competitive level reduces the demand for labour and can create unemployment, unless the higher wage is offset by the higher productivity of the workers.

Institutions

The institutions of wage bargaining include the trade unions, the employers' associations, and the legal framework. The framework determines the rights of the parties, the coverage of the agreements, and the mechanisms for the resolution of disputes.

The coverage of the bargaining is a key determinant of its effects. In countries with high coverage, the agreements apply to a large share of the workers, including those who are not members of the unions. In countries with low coverage, the agreements apply only to the members.

The coordination of the bargaining affects the outcomes. In countries with coordinated bargaining, the wage settlements take account of the conditions of the economy, which can improve the trade-off between wages and employment.

Effects

The effects of wage bargaining on the economy depend on the institutions and on the conditions. The bargaining can raise wages above the competitive level, which can reduce employment, or it can improve the conditions of the workers without reducing employment, if the higher wages reflect higher productivity.

The bargaining also affects the response of wages to shocks. In economies with centralised bargaining, the wage response may be faster, which can facilitate the adjustment. In economies with decentralised bargaining, the response may be slower.

The design of the institutions must balance the objectives of the workers and of the employers, and it must take account of the conditions of the economy. The reform of the institutions is a subject of debate in many countries.

The Union Behavior

The unions are the organizations that represent the workers in the wage bargaining, and their behavior is central to the analysis.

The unions may pursue the objectives including the wages, the employment, and the other conditions. The choice of the objective affects the outcome of the bargaining, since the union may trade the wages for the employment.

The analysis of the union behavior uses the models of the union preferences, which specify the trade-off between the wages and the employment. The models inform the understanding of the bargaining outcomes.

The Bargaining and the Employment

The wage that results from the bargaining may be above the competitive level, which reduces the demand for the labour and can create the unemployment.

The effect on the employment depends on the bargaining power and on the elasticity of the demand for the labour. The higher the elasticity, the larger the effect on the employment.

The analysis considers the possibility that the higher wage reflects the higher productivity, in which case the effect on the employment may be limited. The design of the policy must consider the two possibilities.

The Reform of the Bargaining

The reform of the wage bargaining is a subject of the debate in the many countries, and it concerns the level, the coverage, and the coordination of the bargaining.

The reform may involve the decentralization of the bargaining to the firm level, the reduction of the coverage, and the change in the coordination. The effects of the reform depend on the context and on the other institutions.

The analysis of the reform informs the design of the policy and the understanding of the effects on the wages and the employment.

Summary

Wage bargaining is the process by which the wages are determined through the negotiation, and it is a central institution of the labor market. The analysis of the levels, the models, and the institutions informs the understanding of the wage determination and of the effects on the economy.

See also

• Labour Economics
• Institutional Economics
• Industrial Organization