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Getting Together and Breaking Apart: The Decline of Centralised Collective Bargaining

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  • Richard B. Freeman
  • Robert Gibbons

Abstract

This paper studies the stability of centralized wage-setting systems in light of the on-going decentralization of labor relations in much of the Western world. It takes the decline of peak level bargaining in Sweden, the traditional archetype of centralized collective bargaining, as its key case for study, but is intended to speak to other cases as well. Like many earlier analysts, we argue that centralization offers potential economic gains by internalizing the costs of inefficient wage inflation. With this potential benefit, however, comes a cost: centralized decisions are not sufficiently responsive to local conditions. To avoid excessive inflexibility, the center can allow for "wage drift" at the local level (i.e., local wage settlements above the central agreement), but once the center allows wage drift, it becomes difficult to distinguish between justifiable drift due to local economic conditions and unjustifiable drift in the self-interest of local bargaining pairs. Thus, centralized wage-setting systems face a tradeoff: allowing less drift makes it easier to monitor local bargaining pairs but harder to achieve the appropriate responsiveness to local conditions. We develop a game-theoretic model of this tradeoff, and consider how the center's optimal policy moves towards decentralization (i.e., towards allowing more drift) as the cost of inflexibility rises. We then interpret the evolution of centralized bargaining in Sweden in light of the model. We argue that centralized bargaining flourished when the private-sector blue-collar workers (represented by LO) dominated the workforce, but began to wane as public-sector and white-collar unions grew in strength, as skill differentials in decentralized labor markets grew in size, and as product-market competition intensified (especially through the shortening of product lifecycles).

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4464.

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Date of creation: Sep 1993
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Publication status: published as Richard B. Freeman, Robert S. Gibbons. "Getting Together and Breaking Apart: The Decline of Centralized Collective Bargaining ," in Richard B. Freeman and Lawrence F. Katz, Editors, "Differences and Changes in Wage Structures" University of Chicago Press (1995)
Handle: RePEc:nbr:nberwo:4464

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References

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  1. Lindbeck, A., 1990. "The Swedish Experience," Papers 482, Stockholm - International Economic Studies.
  2. Horn, H. & Wolinsky, A., 1988. "Bilateral Monopolies And Incentives For Merger," Papers 410, Stockholm - International Economic Studies.
  3. Calmfors, Lars & Horn, Henrik, 1986. "Employment Policies and Centralized Wage-Setting," Economica, London School of Economics and Political Science, vol. 53(211), pages 281-302, August.
  4. Lundberg, Erik, 1985. "The Rise and Fall of the Swedish Model," Journal of Economic Literature, American Economic Association, vol. 23(1), pages 1-36, March.
  5. Holmlund, Bertil & Zetterberg, Johnny, 1991. "Insider effects in wage determination : Evidence from five countries," European Economic Review, Elsevier, vol. 35(5), pages 1009-1034, July.
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Citations

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Cited by:
  1. Davis, Steven J. & Henrekson, Magnus, 2005. "Wage-setting institutions as industrial policy," Labour Economics, Elsevier, vol. 12(3), pages 345-377, June.
  2. Lindbeck, A & Snower, D-J, 1996. "Centralized Bargaining, Multi-Tasking, and Work Incentives," Papers 620, Stockholm - International Economic Studies.
  3. repec:iab:iabmit:v:28:i:3:p:383-390 is not listed on IDEAS
  4. Gerlach, Knut & Meyer, Wolfgang, 1995. "Tarifverhandlungssysteme, Lohnhöhe und Beschäftigung (Wage rate systems, wage levels and employment)," Mitteilungen aus der Arbeitsmarkt- und Berufsforschung, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 28(3), pages 383-390.
  5. repec:iab:iabmit:v:36:i:4:p:649-660 is not listed on IDEAS
  6. Schnabel, Claus, 2005. "Gewerkschaften und Arbeitgeberverbände: Organisationsgrade, Tarifbindung und Einflüsse auf Löhne und Beschäftigung (Trade unions and employers' associations * densities, bargaining coverage and ef," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 38(2/3), pages 181-196.
  7. Brunello, Giorgio, 1998. "Does centralised bargaining reduce individual effort?," European Journal of Political Economy, Elsevier, vol. 14(2), pages 381-406, May.
  8. Wolfgang Pollan, 2004. "Pattern Bargaining and Wage Leadership in Austria," WIFO Monatsberichte (monthly reports), WIFO, vol. 77(3), pages 197-211, March.
  9. Brunello, Giorgio & Comi, Simona, 2000. "Education and Earnings Growth: Evidence from 11 European Countries," IZA Discussion Papers 140, Institute for the Study of Labor (IZA).
  10. Norbert Berthold & Rainer Fehn, 2003. "Unemployment in Germany: Reasons and Remedies," CESifo Working Paper Series 871, CESifo Group Munich.
  11. Koeniger, Winfried & Leonardi, Marco & Nunziata, Luca, 2004. "Labour Market Institutions and Wage Inequality," IZA Discussion Papers 1291, Institute for the Study of Labor (IZA).
  12. repec:iab:iabzaf:v:38:i:2/3:p:181-196 is not listed on IDEAS
  13. repec:wfo:wquart:y:2004:i:2:p:88-101 is not listed on IDEAS
  14. Jirjahn, Uwe, 2003. "Betriebsräte, Tarifverträge und betriebliches Lohnniveau (Works councils, wage agreements and the company wage level)," Mitteilungen aus der Arbeitsmarkt- und Berufsforschung, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 36(4), pages 649-660.
  15. Bosello, Francesco & Carraro, Carlo, 2001. "Recycling energy taxes: impacts on a disaggregated labour market," Energy Economics, Elsevier, vol. 23(5), pages 569-594, September.
  16. Richard Jackman, 1998. "European Unemployment: Why is it so High and What Should be Done About it?," RBA Annual Conference Volume, in: Guy Debelle & Jeff Borland (ed.), Unemployment and the Australian Labour Market Reserve Bank of Australia.

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