The rise and fall of centralized wage bargaining

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During the three decades spanning the early 50’s to the early 80’s, the wagesetting process in most Northern European countries was dominated by centralized bargaining, where peak level labor and employer associations set wages nationwide. In the early 80’s centralized wage bargaining began to collapse. In this paper we assess a novel explanation both for the initial establishment of a centralized wagesetting process, and for its subsequent collapse. According to our theory, centralized wage bargaining was set up as a response to the spillovers created by the unemployment benefit program. Its collapse was the result of the increase in the productivity gap across workers, brought about by equipment-specific technological progress and equipment-skill complementarity

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Published 29 August 2011
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Departamento de Economía Universidad Carlos III de Madrid  Calle Madrid, 126 28903 Getafe (Spain) Fax (34) 916249875 The Rise and Fall of Centralized Wage Bargaining  Working Paper 11-29 Economic Series August, 2011                 Salvador Ortigueira Universidad Carlos III de Madrid August 29, 2011 Abstract During the three decades spanning the early 50’s to the early 80’s, the wage- setting process in most Northern European countries was dominated by centralized bargaining, where peak level labor and employer associations set wages nationwide. In the early 80’s centralized wage bargaining began to collapse. In this paper we assess a novel explanation  both for the initial establishment of a centralized wage- setting process, and for its subsequent collapse. According to our theory, centralized wage bargaining was set up as a response to the spillovers created by the unemploy- ment benefit program. Its collapse was the result of the increase in the productivity gap across workers, brought about by equipment-specific technological progress and equipment-skill complementarity.    Keywords: Wage-Bargaining Arrangements; Unemployment Benefits; Equipment-Specific  Technological Progress; Equipment-Skill Complementarity.  JEL Classification Numbers: J31; J41; J51.   I thank the comments of two referees and the Editor. I am also grateful to seminar participants at the University of Pennsylvania, Cornell, Penn State, Arizona State, Southampton, The European University Institute, St. Andrews, Humboldt-Berlin, Bilbao, the EU Institute in Tokyo and at Osaka University. Financial support from the Spanish Ministerio de Ciencia e Innovacio´n under grant 2011/00049/001 is gratefully  acknowledged. Department of Economics, Universidad Carlos III de Madrid. Calle Madrid 126, 28903 Getafe (Spain).  E-mail: Salvador.Ortigueira@uc3m.es.    1
1IntroductionFromtheendoftheSecondWorldWaruntiltheearly80’s,laborunionsinNorthernEuropeancountriescombinedintoaunions’federationwhichwasmandatedtomeetwiththeemployers’associationandnegotiatewagesnationwide.Thiswage-settingarrange-mentreacheditsmaximumstrengthintheheavilyunionizedScandinavianeconomies—Denmark,FinlandandSweden—andhasbeenreferredtoastheScandinavianmodelorthecentralizedwage-bargainingmodel.Existingquantitativemeasuresofcentraliza-tioninwage-bargainingshowthatthisarrangementbegantocollapseintheearly80’s,andthatitwentondecliningatleastuntilthemid90’s.Furthermore,thechronologyofeventsinSwedensupportsthehypothesisthatthecollapseofcentralizedbargainingwastheresultofabreakdownintheunions’alliance[seee.g.FreemanandGibbons(1995)].Inviewofthesefactsweconstructamacroeconomicmodelintendedtoprovideanswerstothefollowingquestions:Whydidlaborunionschoosetoformafederationandengageincentralizedwagenegotiationsinthefirstplace?Whatmadelaborunionschangetheirstrategiesandundertaketheirownwagenegotiations,abandoninganarrangementthathadprovedusefulfor30years?Previousliterature(wereviewkeycontributionsinthenextsection)hasmadeclearthatcentralizationwasbroughtaboutbytheneedtoavoidpotentialnegativeexternalitiesthatcouldarisefromadecentralizedwage-settingprocessinhighlyunionizedeconomies.Inthispaper,weputforththenovelideathatthemainexternalityisafiscalone,andassess,withthehelpofasimpleequilibriummodel,whethersuchexternalitycanindeedleadtotheestablishmentofcentralizednegotiations.Ourmodelexplainsthecollapseofcentralizationintermsoftechnologicalchange,whichisexplicitlymodeledusingrecentempiricalevidence.Themodelwepresentabstractsfromanumberofinstitutionsanhistoricaldevelopmentsthatmighthaveplayedanimportantroleinthedeterminationofthewage-settingprocess.Hence,thispaperintendsneithertochallengeprevioustheoriesnortoofferarevisionistviewofmodernScandinavianeconomichistory.Ouraimissimplytointroduce,andassess,anewhypothesisinthedebateontheriseandfallofcentralizedwagebargaining.Eventhoughthemodelweproposeisratherstylized,especiallyconcerningissuesnon-centraltoourarguments,itcaptureswellthemaintensionswethinkshapethefeedback2
frompublicinsuranceandtechnologytothewage-bargainingarrangement,afeedbackthatwillhelpusexplaintheriseandfallofcentralization.Themainingredientsofourtheoryare:government-funded,union-administeredunemploymentbenefits,progressivedirecttaxation,andtechnologicalprogress.Boththesetupofcentralizationanditscollapsecanbeaccountedforintermsoftheinterplayoffiscalandtechnologicallinksamongdifferenttypesofworkers.Fiscallinksarecreatedbytheunemploymentbenefitsprogram,andtechnologicallinksbytheproductionprocess.Ourmodelingoftheingredientsmentionedabove,andtheirroleinshapingthelinksamongworkers,isthefollowing.Union-administeredunemploymentbenefits(Ghentsys-tem)leadstohighunionizationrates.1Hence,wewillassumefullunionization.Theunions’roleistodisbursebenefitsandnegotiatewagesinordertomaximizetheaffiliatedworker’snetincome.Undergovernment-fundedbenefits,whenaunionnegotiatesinadecentralizedmanneritimposesanexternalityonotherunions,asittransferspartoftheburdenoffinancingbenefitsforitsownunemployedtotherestoftheeconomy.Thatis,aworker’snetincomedependsnotonlyonthewagehisunionnegotiates,butalsoonthewagesnegotiatedbyallotherunionsintheeconomy.Thiscreatesfiscalandbenefitexternalitiesamongunionswhennegotiationisdecentralized.Workersarealsolinkedbytheproductionprocess,andtechnicalchangeshapesthenatureofthatlink.OurmodelingoftheproductionprocessanditsevolutionduringthepostwarperiodisbasedonGreenwood,HercowitzandKrusell(1997).Technologicalprogressisinvestmentspecific,asitisembodiedinnewcapitalequipment(i.e.,inordertorealizethebenefitsoftechnologicalprogressfirmsmustinvestinnewequipment).Fol-lowingthisapproachtotechnologicalprogressKrusell,Ohanian,Rı´os-RullandViolante(2000)andLindquist(2005)estimateanaggregateproductionfunctionfortheU.S.andtheSwedisheconomies,respectively.Theyfindevidencefortheexistenceofequipment-skillcomplementarity.Thecombinationofequipment-specictechnicalprogressandequipment-skillcomplementarityyieldsanincreaseinthespreadoflaborproductivityacrossworkers.Inacalibratedversionofourmodel,weshowthattheinterplayofthetwolinkages1UnionizationratesincountrieswithaGhentsystem,likeSweden,areabove90%,and,contrarytotheUS,theUKandothercontinentalEuropeancountrieshavenotshownatendencytodecline.(SeeClasenandViebrock(2008)forastudyoflaborunionmembershipandtheGhentsystem.)3