Wage Determination in Post-War Italy

ABSTRACT: A bargaining model is proposed and tested in order to explain the irrelevance of the general labour market conditions to wage settlements in the post-war Italian economy. The model is a “right to manage model”, but the solution cannot be improved, being both on the labour demand curve and on the contract curve. The reason for such an outcome is that both firms and unions have priorities, and distinguish the labour force between insiders and outsiders. Different definitions of insiders are used, but in the postwar Italian economy the employees and ex-employees of the industrial sector appear to be the share of the labour force which have been better protected by both contractual parties.     

Gender and nationality pay gaps in light of organisational theories

This paper analyses wage inequality with respect to gender and nationality within German establishments. It is a large-scale analysis based on linked employer-employee data from the Institute for Employment Research (LIAB). Wage inequality is measured as the intra-establishment pay gap by gender and nationality, taking into account that human capital may not be equally distributed across the different groups of employees. Consistent with economic theories of discrimination we find significant pay gaps by gender and nationality, even taking into consideration employees’ qualifications. We can show that pay differentials between men and women are much larger on average than those between Germans and non-Germans, and that both pay gaps exhibit a tremendous variation across establishments. Drawing on organisational theories we inquire as to how selected firm characteristics are related to the variation of these intra-firm pay gaps and derive hypotheses about which establishments have a greater incentive and/or are more able to pursue wage equality in their workforces. By use of regression analysis we then investigate whether variables that reflect the firms’ social, institutional and cultural environment and their resource requirements are empirically related to the sizes of the pay gaps. The results are rather ambiguous, suggesting larger, innovating and foreign-owned establishments with a larger share of non-German employees and with a collective bargaining agreement to have smaller gaps, particularly with respect to gender.     

Decentralizing Wage Bargaining in Germany — A Way to Increase Employment?

Abstract. The area‐wide wage agreement is at the centre of Germany's system of collective bargaining. In recent years, however, there has been a tendency towards the decentralization of collective bargaining. Individual wage agreements have led to more moderate wage developments, whilst collective agreements with individual firms, and agreements at the production unit level, have not had this moderating effect. On the other hand, collective bargaining has become more flexible, leading to greater pay differentiation. The further decentralization of collective bargaining, although desirable, has given rise to objections based in constitutional law and to resistance from employees and employers.     

The Skilled Wage Premium and the Growth of Small Firms in UK Manufacturing

We document the role of small firms in explaining the growth of the skilled/unskilled wage premium in UK manufacturing over the 1980s. Our major findings are (i) the share of manufacturing employment in small firms' (0–99) employees has risen by 35 percent over this period; (ii) small firms pay more unequal wages than do large firms: the non-manual/manual wage premium is 1.53 in small firms and 1.50 in firms of over 1,500 workers; (iii) the growth in small firms over the period explains about 20 percent of the rise in the skilled/unskilled wage premium.     

The Effect of Mergers and Acquisitions on Employees: Wealth Transfer,Gain‐Sharing or Pain‐Sharing?

This paper considers whether gains made by shareholders from corporate takeovers are achieved at the expense of employees, as proposed by the ‘wealth transfer’ perspective. It analyses the contribution of employee lay‐offs, along with employment and wage changes, to the takeover premium and abnormal share price movements. The analysis draws on a unique dataset of British takeovers, combining documentary, share price and accounting data. The results show that lay‐offs planned at the takeover have either no effect or adverse effects on shareholder returns. Wages growth is positively, not inversely, related to shareholder returns from the second year after the takeover, whilst positive employment changes have a similar effect in the following year. Closer scrutiny indicates that labour and shareholders share gains when the firm does well, but share pain when it does not. There is evidence, therefore, that labour and shareholder interests can be complementary, rather than antagonistic, after takeovers.     

What Survey Data Reveal about Price and Wage Rigidity in Portugal

This paper exploits the information collected from a survey conducted on a sample of Portuguese firms to study the patterns of firms’ price and wage adjustments and the extent of nominal price and wage rigidities. The evidence shows that the frequency of price changes varies substantially across sectors and depends on the intensity of competition, the share of labor costs and firms’ price reviewing behavior. The results also suggest that the constraint imposed by the presence of downward nominal wage rigidity is less important in firms where the fraction of permanent and high‐skilled workers is lower and the share of flexible pay components is higher.     

Preliminary Evidence on Wage Setting in Greek Manufacturing

Abstract. The negotiating power of the unions and their role in wage determination depends on the level of centralization of the wage bargaining system as well as on other institutional arrangements. In this study, we estimate a set of wage equations in order to study the employment effects of different unions’ stances in wage determination as well as to investigate other characteristics of employment in Greek manufacturing. We discriminate between workers and employees (blue‐ and white‐collar workers) and between sectors in order to capture differences in the relative supply as well as differences in the negotiating power among the staff of the same industry. Empirical findings reveal that the persistence of unemployment arises as a result of the great bargaining power of the unions in negotiations at a sectoral level. White‐collar workers exhibit a stronger negotiating power compared with blue‐collar workers because of differences in the institutional framework.     

Incentive effects and the income tax treatment of employer-provided workplace benefits

Employers often provide their employees with different kinds of benefits in the workplace to create comfortable working conditions. In order to avoid distortions of the wage-benefit ratio in employee compensation, economic theory suggests that fringe benefits should be subject to income taxation at a value placed on them by employees. This article shows that this approach does not apply to workplace benefits. Since the goal of these benefits is to reduce the employees’ disutility from work, treating them simply as wage substitutes disregards their incentive effects. Therefore, the rules for taxing workplace benefits are derived from an agency model. It is shown that in contrast to the standard economic approach, cost can be a more efficient tax base than willingness to pay, even though this results in higher tax payments. Moreover, with non-distortionary tax rates it is always better to tax the employer rather than the employee.     

The Effect of Temporary Agency Workers on Wage of Permanent Employees: Evidence From Linked Employer‐Employee Data

The effect of flexibility at‐the‐margin on wage of permanent employees is evaluated using Italian Linked Employer‐Employee Data for the period 1991–2004. Temporary Agency Workers (TAW) introduced in Italy in 1997 in some specific industries represents a form of flexible job providing a quasi‐experimental setup that can be used to obtain identification by applying difference‐in‐differences. Concerns related to confounding trends are addressed through several robustness and falsification tests. Norms introducing TAW in all sectors in 2000 are also exploited. Results show an increase in permanent employees’ wage in industries involved in the reform. This evidence is consistent with insider‐outsider theories wherein — in a dual labor market — a rise in the share of unprotected employees may spill over upon insiders’ 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.     

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.     

New Firms as Employers: The Wage Penalty for Voluntary and Involuntary Job Switchers

According to previous research, new firms pay lower wages. However, previous studies have been unable to control for the possibility that the opportunity costs of accepting employment at new firms may differ across individuals. In this paper, we investigate whether a wage penalty for being employed at a new firm exists if we take the individual employee's experience and status in the labour market into consideration. We focus on individuals who decide to switch jobs and use matched employee–employer data about all firms and employees in Sweden for the period 1998–2010. Our results show that the share of job transitions into lower wages are higher for those who switch to new firms compared with incumbent firms (40 per cent and 31 per cent, respectively). Our endogenous wage equation estimates indicate that being an involuntary job switcher has an equally negative effect on wages at both new and incumbent firms. However, the positive effect of education on wages is more pronounced for job switchers selecting into incumbent firms.     

Labour Market Regulation,Flexibility and Employment

ABSTRACT: Chronic unemployment and slow employment growth in some countries have led to calls for more labor-market “flexibility”. This paper defines the flexibility issue in terms of legally-mandated “severance”, a generalized employment cost linked to seniority. A mandated severance benefit can stand for a variety of programs including employer-provided employment guarantees, payments which must be made to laid-off workers, and compensation for wrongful discharge. Such a mandated cost can be seen as a payroll tax on the employer, raising the issue of tax incidence. Employers often take the view that labor costs are given and that mandated costs are simply add-ons to pre-existing cost levels. However, the literature on tax incidence suggests that a significant portion of “employer-paid” payroll taxes are shifted to labor in the form of lower wages. Such shifting should reduce the dis-employment effects attributed to severance. A model is provided of a firm upon which a severance mandate is imposed. Even at the micro level, the firm can shift some of the cost of severance to employees by lowering wages — although at the expense of higher turnover costs associated with increased quit rates. At the macro level, to the extent that firms reduce employment, there could be still further downward wage adjustments which would shift the severance burden to labor and mitigate the dis-employment effect. Ultimately, if the natural rate of unemployment is raised by severance mandates, the age-old question is raised of why wages do not fall in the face of labor surpluses. The true inflexibility to be explained, therefore, is in wage determination.     

Trade Unions,Wage Bargaining Coordination,and Foreign Direct Investment

Conventional wisdom is that a high trade union bargaining strength and a system of coordinated wage bargaining reduce the attractiveness of an economy as a location for foreign direct investment, although there is limited evidence for this. The paper takes panel data for 19 OECD economies to examine the relationship between trade union bargaining strength, bargaining coordi nation, and a range of incentives for inward foreign direct investment. It finds a strong negative effect of trade union density on inward foreign direct investment, which is dependent on the degree of wage bargaining coordination. A high degree of coordination weakens the deterrent effect of high union density, which is consistent with the notion that under certain circumstances a coordinated increase in wages can increase profits of the multinationals by hurting domestic firms.     

Size,Skill and Sorting

Abstract. The rise in inequality between the 1970s and the 1990s and the persistent gap in pay between large and small employers are two of the most robust findings in the study of labor markets. Mainstream economists focus on differences in observable and unobservable skills to explain both the overall rising inequality and the size–wage gap. In this paper we model how increasing returns to skill can affect the size–wage gap both with constant sorting and with size‐biased, skill‐biased technological change (e.g. if large firms always had access to computers, but small firms gained access to computers with the rise of affordable personal computers). We analyze the Current Population Surveys from 1979 to 1993 to determine whether large and small employers are converging in terms of mean wages (the employer size–wage effect), wage structures by occupation and education, characteristics of employees, and wage structures by region. We find mixed evidence of convergence and no consistent support for any single version of human capital theory.     

Supply Chain Contracting Under Competition: Bilateral Bargaining vs. Stackelberg

We analyze contracting behaviors in a two‐tier supply chain system consisting of competing manufacturers and competing retailers. We contrast the contracting outcome of a Stackelberg game, in which the manufacturers offer take‐it‐or‐leave‐it contracts to the retailers, with that of a bargaining game, in which the firms bilaterally negotiate contract terms via a process of alternating offers. The manufacturers in the Stackelberg game possess a Stackelberg‐leader advantage in that the retailers are not entitled to make counteroffers. Our analysis suggests that whether this advantage would benefit the manufacturers depends on the contractual form. With simple contracts such as wholesale‐price contracts, which generally do not allow one party to fully extract the trade surplus, the Stackelberg game replicates the boundary case of the bargaining game with the manufacturers possessing all the bargaining power. In contrast, with sophisticated contracts such as two‐part tariffs, which enable full surplus extraction, the two games lead to distinct outcomes. We further show that the game structure being Stackelberg or bargaining critically affects firms' preferences over contract types and thus their equilibrium contract choices. These observations suggest that the Stackelberg game may not be a sufficient device to predict contracting behaviors in reality where bargaining is commonly observed.     

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.     

The Role of Family Ties in the Labour Market. An Interpretation Based on Efficiency Wage Theory

By casual empiricism, it seems that many firms take explicit account of the family ties connecting workers, often hiring individuals belonging to the same family or passing jobs on from parents to their children. This paper makes an attempt to explain this behaviour by introducing the assumption of altruism within the family and supposing that agents maximize a family utility function rather than an individual one. This hypothesis has been almost ignored in the analysis of the relationship between employers and employees. The implications of this assumption in the efficiency wage models are explored: by employing members of the same family, firms can use a (credible) harsher threat — involving a sanction for all the family’s members in case of one member’s shirking — that allows them to pay a lower efficiency wage. On the other hand, workers who accept this agreement exchange a reduction in wage with an increase in their probability of being employed: this can be optimal in a situation of high unemployment. Moreover, the link between parents and children allows the firm to follow a strategy that solves the problem of an individual’s finite time horizon by its making use of the family’s reputation.     

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.     

When good deals need help getting done: Articulating side payment strategies

Value creation often requires coordinated action by multiple firms. Existing research on value-based strategy emphasizes situations where both parties reasonably anticipate sharing the gains to cooperation and develop arms-length contracts through bargaining. Less existing research on value-based strategy addresses situations where value-creating market transactions fail to occur because one party expects to be worse off from coordinated action, precluding their participation. Although vertical integration or informal contracts potentially overcome this reticence, these solutions are not always feasible or incur costs of their own. We model how firms may be able to strike a stable deal and create value by employing a side payment strategy. This technique mitigates transactional frictions by playing a biform game with a cooperative first stage, which modifies the payoffs in a non-cooperative second stage so that coordinated action becomes feasible in a stable agreement. We also extend the basic analysis to consider variations in contract enforceability, reneging, and presence of multiple counterparties.