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Market power, dismissal threat, and rent sharing: The role of insider and outsider forces in wage bargaining

  • Anabela Carneiro
  • Pedro Portugal

Purpose – The purpose of this study is to investigate to what extent the existence of high labor adjustment costs has some influence on the process of wage negotiation. In particular, it aims to analyse if the risk of being laid off has any impact on insiders' bargaining power and, consequently, on their wage claims. Design/methodology/approach – A collective bargaining model that closely follows those developed by Nickell et al. and Bentolila and Dolado is adopted and a longitudinal panel of large Portuguese firms from all sectors over the 1993-199 period is used. Findings – The results reveal that firms where insider workers appear to have more bargaining power tend to pay higher wages. In particular, we found that the threat of dismissal tends to weaken insiders' bargaining power and, consequently, to depress wages. Research limitations/implications – In future research an attempt should be made to measure directly the labor turnover costs. Originality/value – This paper presents robust empirical evidence using micro-data for individual firms that support one of the predictions of the insider-outsider theory that wages will be higher in sectors (firms) with high labor turnover costs.

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Article provided by Emerald Group Publishing in its journal International Journal of Manpower.

Volume (Year): 29 (2008)
Issue (Month): 1 (May)
Pages: 30-47

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Handle: RePEc:eme:ijmpps:v:29:y:2008:i:1:p:30-47
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  1. Nickell, Stephen & Wadhwani, Sushil B, 1989. "Insider Forces and Wage Determination," CEPR Discussion Papers 310, C.E.P.R. Discussion Papers.
  2. Holzer, Harry J & Montgomery, Edward B, 1993. "Asymmetries and Rigidities in Wage Adjustments by Firms," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 397-408, August.
  3. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
  4. Hilderth, A.K. & Oswald, A.J., 1993. "Rent-Sharing and Wages: Evidence form Company and Establishment Panels," Economics Series Working Papers 99154, University of Oxford, Department of Economics.
  5. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, March.
  6. David G. Blanchflower & Andrew J. Oswald & Mario D. Garrett, 1989. "Insider Power in Wage Determination," NBER Working Papers 3179, National Bureau of Economic Research, Inc.
  7. Blanchflower, David G & Oswald, Andrew J & Sanfey, Peter, 1996. "Wages, Profits, and Rent-Sharing," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 227-51, February.
  8. Wulfsberg, F., 1995. "An Application of Wage Bargaining Models to Norwegian Panel Data," Memorandum 29/1995, Oslo University, Department of Economics.
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  10. John M. Abowd & Thomas Lemieux, 1991. "The Effects of Product Market Competition on Collective Bargaining Agreements: The Case of Foreign Competition in Canada," NBER Working Papers 3808, National Bureau of Economic Research, Inc.
  11. Blanchflower, David G, 1991. "Fear, Unemployment and Pay Flexibility," Economic Journal, Royal Economic Society, vol. 101(406), pages 483-96, May.
  12. Richard Blundell & Steve Bond, 1999. "GMM estimation with persistent panel data: an application to production functions," IFS Working Papers W99/04, Institute for Fiscal Studies.
  13. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  14. Lindbeck, Assar & Snower, Dennis J., 1987. "Cooperation, Harassment, and Involuntary Unemployment: An Insider-Outsider Approach," CEPR Discussion Papers 196, C.E.P.R. Discussion Papers.
  15. Holmlund, B. & Zetterberg, J., 1989. "Insider Effects In Wage Determination: Evidence From Five Countries," Papers 1989a, Uppsala - Working Paper Series.
  16. Gregory, R G, 1986. "Wages Policy and Unemployment in Australia," Economica, London School of Economics and Political Science, vol. 53(210(S)), pages S53-74, Supplemen.
  17. Stephen Nickell & D. Nicolitsas, 1994. "Wages," LSE Research Online Documents on Economics 51644, London School of Economics and Political Science, LSE Library.
  18. Graafland, J J, 1992. "Insiders and Outsiders in Wage Formation: The Dutch Case," Empirical Economics, Springer, vol. 17(4), pages 583-602.
  19. Solow, Robert M, 1985. " Insiders and Outsiders in Wage Determination," Scandinavian Journal of Economics, Wiley Blackwell, vol. 87(2), pages 411-28.
  20. Nickell, S & Vainiomaki, J & Wadhwani, S, 1994. "Wages and Product Market Power," Economica, London School of Economics and Political Science, vol. 61(244), pages 457-73, November.
  21. Richard Blundell & Steve Bond & Frank Windmeijer, 2000. "Estimation in dynamic panel data models: improving on the performance of the standard GMM estimator," IFS Working Papers W00/12, Institute for Fiscal Studies.
  22. Lindbeck, Assar & Snower, Dennis J, 1986. "Wage Setting, Unemployment, and Insider-Outsider Relations," American Economic Review, American Economic Association, vol. 76(2), pages 235-39, May.
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  24. Ana Rute Cardoso & Pedro Portugal, 2005. "Contractual Wages and the Wage Cushion under Different Bargaining Settings," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 875-902, October.
  25. Lindbeck, Assar & Snower, Dennis J, 1985. "Explanations of Unemployment," Oxford Review of Economic Policy, Oxford University Press, vol. 1(2), pages 34-59, Summer.
  26. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  27. Pedro Portugal & Olivier Blanchard, 2001. "What Hides Behind an Unemployment Rate: Comparing Portuguese and U.S. Labor Markets," American Economic Review, American Economic Association, vol. 91(1), pages 187-207, March.
  28. Nickell, Stephen & Kong, Paul, 1992. "An investigation into the power of insiders in wage determination," European Economic Review, Elsevier, vol. 36(8), pages 1573-1599, December.
  29. Lever, Marcel H. C. & van Werkhooven, Jolanda M., 1996. "Insider power, market power, firm size and wages: Evidence from Dutch manufacturing industries," Labour Economics, Elsevier, vol. 3(1), pages 93-107, August.
  30. Forslund, Anders, 1994. "Wage Setting at the Firm Level--Insider versus Outsider Forces," Oxford Economic Papers, Oxford University Press, vol. 46(2), pages 245-61, April.
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