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Wage Interactions: Comparisons or Fall-back Options?


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  • Jennifer Smith


It is widely accepted that wage comparisons with other firms play an important part in wage bargaining, but what is less clear is precisely why these comparisons are important. There are two main explanations. First, that fairness considerations mean workers are unwilling to see their wage fall below that offered in other similar firms. Second, that wages in other firms constitute a worker's fall-back option since if the worker leaves his current firm he will probably seek employment in the same industry. Unfortunately, it is difficult to distinguish between these two explanations since both offer similar predictions. This paper proposes that these two explanations can be differentiated by looking at the role of 'pay leaders' (firms that set the standard for later settlements and which, anecdotal evidence suggests, dominate changes in pay and conditions in an industry) in wage bargaining. If the fall back option is important then the pay leader should only influence wages in other firms to the extent that the pay leader firm constitutes one of many firms that workers could move to. If, on the other hand, fairness is important then the pay leader can have a disproportionate influence by creating the standard for other wage negotiations. Using a unique panel of data covering 321 bargaining units in the UK chemical industry between 1978 and 1989, the paper then looks at the influence of the pay leader in that industry (ICI) on wage setting in other firms. It finds that the ICI wage does indeed have a disproportion effect on wage bargains in other firms; indeed ICI's wage dominates all other measures that capture the worker's fall-back option. This supports the notion that it is fairness considerations that drive wage interactions.

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Paper provided by Bank of England in its series Bank of England working papers with number 37.

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Date of creation: Aug 1995
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Handle: RePEc:boe:boeewp:37

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  1. Brown, William & Walsh, Janet, 1991. "Pay Determination in Britain in the 1980s; the Anatomy of Decentralization," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 7(1), pages 44-59, Spring.
  2. Clark, Simon, 1991. "Inventory Accumulation, Wages, and Employment," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 101(405), pages 230-38, March.
  3. Ingram, Peter N, 1991. "Ten Years of Manufacturing Wage Settlements: 1979-89," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 7(1), pages 93-106, Spring.
  4. Nickell, Stephen J, 1987. "Why Is Wage Inflation in Britain So High?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 49(1), pages 103-28, February.
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Cited by:
  1. Knell, Markus & Stiglbauer, Alfred, 2009. "The impact of reference norms on inflation persistence when wages are staggered," Working Paper Series, European Central Bank 1047, European Central Bank.
  2. Ascari, Guido & Garcia, Juan A., 2004. "Relative wage concern: the missing piece in the contract multiplier?," Research in Economics, Elsevier, Elsevier, vol. 58(4), pages 343-369, December.
  3. repec:onb:oenbwp:y::i:153:b:1 is not listed on IDEAS
  4. Francis Breedon & Ian Twinn, 1995. "Valuation of underwriting agreements for UK rights issues: evidence from the traded option market," Bank of England working papers, Bank of England 39, Bank of England.
  5. Gaetano D’Adamo & Mariam Camarero & Cecilio Tamarit, 2013. "Wage leadership models: a country-by-country analysis of the EMU," Working Papers, Department of Applied Economics II, Universidad de Valencia 1317, Department of Applied Economics II, Universidad de Valencia.
  6. Panos, Georgios & Theodossiou, Ioannis, 2010. "Unionism and Peer-Referencing," Stirling Economics Discussion Papers, University of Stirling, Division of Economics 2010-03, University of Stirling, Division of Economics.
  7. Stoyanov, A. & Zubanov, N.V., 2012. "Productivity Gains from Worker Mobility and their Distribution between Workers and Firms," ERIM Report Series Research in Management, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasm ERS-2012-009-STR, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  8. Andy Haldane & Bennett McCallum & Chris Salmon, 1996. "Base Money Rules in the UK," Bank of England working papers, Bank of England 45, Bank of England.
  9. Marco Bianchi, 1996. "A Comparison of Methods for Seasonal Adjustment of the Monetary Aggregates," Bank of England working papers, Bank of England 44, Bank of England.
  10. Tomohara, Akinori & Takii, Sadayuki, 2011. "Does globalization benefit developing countries? Effects of FDI on local wages," Journal of Policy Modeling, Elsevier, Elsevier, vol. 33(3), pages 511-521, May.
  11. Stoyanov, Andrey & Zubanov, Nikolay, 2013. "Money on the Table? Firms' and Workers' Gains from Productivity Spillovers through Worker Mobility," IZA Discussion Papers 7702, Institute for the Study of Labor (IZA).


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