Employer Wage Differentials in Germany: A Comparative Note

The paper contributes to the growing empirical literature on employer wage differentials, presenting first estimates for West Germany and comparing them with recent findings from other studies for the USA, France and Denmark. The empirical results show that the variation of global employer wage differentials is comparatively low in West Germany and has remained stable during the first half of the 1990s. This low dispersion results from wage setting for blue‐collar workers, while cross‐country differences are negligible for white‐collar workers. Employer wage differentials have, however, become more important for the remuneration of West German blue‐collar workers during the period investigated.     

Is Wage Leadership an Instrument to Coordinate Unions’ Wage Policy?The Case of Imperfect Product Markets

Given an oligopolistic product market, trade unions organized at firm level want to coordinate their bargaining activities. If for some exogenous reasons centralization is not possible, unions could try to coordinate wage setting by wage leadership. The outcome of such wage leadership is compared with that of an uncoordinated bargaining and is characterized by higher utilities for all unions. But wages and employment levels are not symmetrical either for unions or for firms. The leader firm employment decreases and the follower firm employment rises compared with uncoordinated bargaining. This may cause problems with the implementation of wage leadership.     

Wage Bargaining with On‐the‐Job Search: Theory and Evidence

Most applications of Nash bargaining over wages ignore between‐employer competition for labor services and attribute all of the workers' rent to their bargaining power. In this paper, we write and estimate an equilibrium model with strategic wage bargaining and on‐the‐job search and use it to take another look at the determinants of wages in France. There are three essential determinants of wages in our model: productivity, competition between employers resulting from on‐the‐job search, and the workers' bargaining power. We find that between‐firm competition matters a lot in the determination of wages, because it is quantitatively more important than wage bargaining à la Nash in raising wages above the workers' “reservation wages,” defined as out‐of‐work income. In particular, we detect no significant bargaining power for intermediate‐ and low‐skilled workers, and a modestly positive bargaining power for high‐skilled workers.     

Union Bargaining,Wage Differentials and Employment

Abstract. Reviewing empirical studies concerning the corporatism-flexibility-performance nexus the paper discusses decentralized and centralized bargaining systems. Revenue pay systems, concession bargaining and two-tier wage systems as means to enhance wage flexibility at the firm level are also considered. Both theoretical and empirical evidence is presented, showing that unions are bargaining for greater employment security for the already employed (the insiders). In return, unions are ready to accept greater wage flexibility and even wage decreases. By contrast, the insider-outsider theory does suggest how unions may accentuate involuntary unemployment, because there may be ways in which a union can help to raise the wages of the insiders without reducing their chances of continued employment.     

Analysing the Gender Wage Gap (GWG) Using Personnel Records

We use monthly personnel records of a large German company for the years 1999–2005 to analyse the gender wage gap (GWG). The unconditional GWG is 15 per cent for blue‐collar and 26 per cent for white‐collar workers. Different returns to entry age explain a substantial part of the GWG as well as segregation of men and women in different hierarchical levels. The relative GWG increases with increasing tenure for blue‐collar but declines for white‐collar workers. Taking into account the different impact of general and firm‐specific human capital on white‐collar and blue‐collar occupation, this is consistent with theories of statistical discrimination.     

Residential Location,Work Location,and Labor Market Outcomes of Immigrants in Israel

We develop and estimate a comprehensive dynamic programming (DP) model for the joint decisions of residential location, employment location, occupational choices, and labor market outcomes. We use data on immigrants from the former Soviet Union (FSU). We provide an extensive empirical evaluation of policies that have been designed to affect the residential and employment location decisions of the migrant population. The results shed new, and important, light on several issues regarding this group of immigrants. We find large regional differences in wages for the white‐collar workers, but only little differences for the blue‐collar workers. A careful examination of a number of policy measures indicate that a direct subsidy, in the form of a lump‐sum transfer, is most effective in achieving the government stated goal of inducing people to reside in the northern region of the Galilee and southern region of the Negev. Other policies, such as rental and wage subsidies, can also be quite effective, but these are more difficult to administer.     

A Theory of the Firm with Non‐binding Employment Contracts

This paper examines an employment relation in which individual workers enjoy some bargaining power vis‐a‐vis the firm although they are not unionized. The main elements of the situations studied here are that the employment contracts are non‐binding across periods of production and that the firm has opportunities to replace workers. The paper analyzes a dynamic model in which the processes of contracting and recontracting between the firm and its workers are intertwined with the dynamic evolution of the firm's workforce. The analysis of the model is somewhat complicated because the employment level is a nondegenerate state variable that evolves over time and is affected by past decisions. The main analytical results characterize certain important equilibria: the profit maximizing and stationary equilibria. The unique stationary equilibrium is markedly inefficient: it exhibits inefficient over‐employment and the steady state wages coincide with the workers' reservation wage. It confirms earlier results derived by Stole and Zwiebel (1996a, b) in the context of a static model and shows that they are very robust even when the firm has nearly frictionless hiring opportunities. In contrast, in the profit maximizing equilibrium the outcome is nearly efficient and the wage exhibits a mark‐up over the reservation wage.     

Efficient Labour Contracts: Impediments and How to Circumvent Them

Efficient labour contracts on wages and employment could contribute to a reduction in unemployment in Europe. Their implementation is hindered by institutional settings and asymmetric incentives at different levels of the bargaining process. Employed workers have no incentives to forego wage increases at the firm level for potential employment gains, while employers’ federations possess no means to guarantee an employment increase for the sector covered by a wage agreement. Decentralization of wage bargaining does not solve this incentive problem. It is demonstrated that the introduction of marketable certificates may reduce the asymmetric incentive effects enabling contracts with higher employment.     

Union–Firm Bargaining,Productivity Improvement and Endogenous Growth

This paper presents a growth model with two sectors. In the high‐tech sector, R&D increases productivity and union–firm bargaining determines wages, but in the traditional sector there are neither R&D nor labour unions. The government is able to regulate union bargaining power. The main results are as follows. Because firms try to escape wage increases through the improvement of productivity by R&D, the increase in union bargaining power boosts R&D and growth. It is welfare enhancing to strengthen (weaken) unions when the growth rate is below (above) some critical level. A specific rule is presented for when de‐unionization is socially desirable.     

Delegation and Wage Determination in Trade Unions

Delegation of wage determination is modelled as the transferral of decision‐making rights to better‐informed agents. The rank and file of trade unions has less information and can, therefore, benefit from delegation. However, delegation might be disadvantageous for union members, since delegates pursue their own objectives. Also, delegates might incur a utility reduction, since becoming a delegate implies forfeiting a better‐paid outside option. We investigate under what conditions delegation of wage bargaining power is beneficial for union members and their potential leaders. The wage and employment effects of delegation are derived.     

Union Power in a Welfare State

Abstract. Most West European countries have suffered from stagflation for many years. Mainstream economics has debated the question in particular in terms of the demand and supply of goods, labour and capital. But in recent contributions a new element has been introduced: the institutional structure of the economy as a source of imbalances. In this article we focus on the institutions of the labour market. For more than a century West European unions have been struggling to transform market economies into a more efficient and just order. Moral persuasion, strikes, and revolutionary threats were their main weapons. After the Second World War governments yielded to the pressure by building up, together with the unions, a welfare state. During the sixties however, the struggle was renewed, although the governments continued to improve the social security system and maintained their responsibility for full employment. A short sketch will be given of the ideological struggle during the first half of the twentieth century, leading to a significant institutional change: the transformation of a system of private wage bargaining into a collective wage bargaining system. Then the neoclassical, the Marxist and the Keynesian view on the effects of union power on the economic performance of a market economy and of a welfare state will be presented. The conclusion is drawn that the methods required to transform a market economy into a welfare state are anomalies as soon as a welfare state is more or less realized. This is particularly so, because the transformation of a welfare state into a centrally planned economy cannot be considered desirable. In present circumstances, it would be appropriate to pay more attention to the design of an extensive system of mediation and arbitrage to reduce the use of the strike weapon.     

Endogenous Contracts in Unionized Oligopoly

We study the endogenous determination of contracts in a unionized oligopoly and the welfare implications thereof. Alternative contracts specify the sequencing in the selection of R&D and wages. They can be classified as ‘fixed’ when the unions set wages before the firms make their R&D decisions or ‘floating’ when the sequencing of these choices is reversed. If the unions are highly employment‐oriented, we find that either all firm–union pairs choose floating‐wage contracts or both contract types may coexist depending on the degree of technological spillovers. However, when the unions have stronger preference over attaining a good wage deal, then it becomes very likely that fixed‐wage contracts will endogenously emerge because they can serve as an insurance device against oppor tunistic wage increases. Our welfare analysis suggests that welfare‐improving contracts may nevertheless not always arise in equilibrium.     

Higher Education Levels,Firms’ Outside Options and the Wage Structure

Abstract. We analyze the consequences of an increase in the supply of highly educated workers on relative and real wages in a search model where wages are set by Nash bargaining. A key insight is that an increase in the average education level exerts a negative externality on wages through its positive externality on the firms’ outside option. As a consequence, the real wage of all workers decreases in the short run. Since this decline is more pronounced for less educated workers, wage inequality increases. In the long‐run a better educated work force induces firms to invest more in physical capital. Wage inequality and real wages of highly educated workers increase while real wages of less educated workers may decrease. These results are consistent with the US experience in the 1970s and 1980s. Based upon differences in legal employment protection we also provide an explanation for the diverging evolution of real and relative wages in Continental Europe.     

Unionization and Labour‐market Discrimination: A Closer Look at Non‐unionized Workers

This paper introduces a model that examines the effects of unions on pay and hiring gaps between non‐unionized men and women in the context of imperfect competition. Although the model does not question the advantages unions obtain for their members, it does show that (1) unions increase wage and occupational discrimination for non‐unionized workers; (2) the non‐unionized sector does not constitute a good comparison group for use in analysing the impact of unions on gender discrimination; and (3) public policies targeting gender differences in occupational sorting can also have a positive impact on gender wage differentials.     

Does Industrial Composition Matter for Wages? A Test of Search and Bargaining Theory

Does switching the composition of jobs between low‐paying and high‐paying industries have important effects on wages in other sectors? In this paper, we build on search and bargaining theory to clarify a key general equilibrium channel through which changes in industrial composition could have substantial effects on wages in all sectors. In this class of models, wage determination takes the form of a social interaction problem and we illustrate how the implied sectoral linkages can be empirically explored using U.S. Census data. We find that sector‐level wages interact as implied by the model and that the predicted general equilibrium effects are present and substantial. We interpret our results as highlighting the relevance of search and bargaining theory for understanding the determination of wages, and we argue that the results provide support for the view that industrial composition is important for understanding wage outcomes.     

Risk Aversion,Collective Bargaining,and Wages in Germany

We develop an open‐shop model of trade union membership in which workers differ in their risk attitudes, and derive conditions under which the bargained wage will fall and union membership will increase with a general rise in risk aversion. Using data from the German Socio‐Economic Panel we define broad bargaining units and show that wages decline as average risk aversion of union members in these units rises, controlling for individual effects of risk aversion. Given a negative relationship between wages and employment, this suggests that secular changes in risk attitudes, because of an aging workforce or greater female labour force participation, can help to explain variations in the employment performance of unionized economies.     

Impact of the Minimum Wage on Youth Labor Markets

We study the effect of the minimum wage on labor market outcomes for young workers using US county‐level panel data from the first quarter of 2000 to the first quarter of 2009. We go beyond the usual estimates of earnings and employment effects to consider how differences across states in the minimum wage affect worker turnover via separations and accessions and job turnover through new job creation and job losses. We find that a higher minimum wage level is associated with higher earnings, lower employment and reduced worker turnover for those in the 14–18 age group. For workers aged 19–21 and 22–24, we find less consistent evidence of minimum wage effects on earnings and employment. But, even for these age groups, a higher minimum wage is found to reduce accessions, separations and the turnover rate.     

Is the Employment Function Structurally Unstable? An Empirical Test: Italian Manufacturing Industry, 1970–1984

Abstract. This paper tests the hypothesis that the high variability of the real input prices (especially real wage) coefficients in the empirical employment equations reflects structural characteristics of the economy considered, namely the balance of power between trade unions and fums. A dynamic equation with output, real wage and real prices of raw materials as explanatory variables is estimated using Italian manufacturing industry data 1970-1984. The model appears to be well specified and consistent with the literature. However, extensive parameter stability analysis yields results compatible with the view of the employment equation as structurally unstable. The fact that the equation appeared to be well specified and representative arouses the suspicion that other equations for different periods and economies could be equally unstable.     

A Note on Job Tenure and Collective Contracts

Abstract. This paper analyses the relationship between individual tenure and the application of collective contracts at the firm level under the specific institutional settings in Germany. The empirical approach is based on a multilevel model and a linked employer–employee data set for the years 1990, 1995, and 2001. The main result is that elapsed tenure is longer in firms applying collective contracts than in companies with individual wage setting: workers in firms with collective contracts benefit not only from higher wages, but also from higher job stability. Furthermore, we find no significant changes in mean tenure during the 1990s as well as stable differences across wage‐setting regimes.     

Discrimination and Resistance to Low‐skilled Immigration

Abstract. This paper shows that the immigration of some low‐skilled workers can be of advantage for low‐skilled natives when the host economy suffers from unemployment due to the presence of trade unions and an unemployment insurance scheme. This benefit arises if trade unions have appropriate bargaining power and preferences for members’ income, labor market discrimination against immigrants is strong enough and the unemployment tax rate is low.