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How Does Government Wage Policy Affect Wage Bargaining in Brazil?

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  • Gonzaga, Gustavo
  • Scandiuzzi, João Carlos

Abstract

Over the last thirty years, Brazil has had official wage policies, with the government determining the minimum rate of adjustment for all wages in the formal sector of the Brazilian economy. The rise in union activism after 1978 and the consequent gradual return of collective bargaining reduced the scope of influence by the government to determine the exact wage rate of the economy. Some authors viewed this phenomenon as a sign of decrease in the importance of the wage policy. In this paper, we argue instead that government wage policy remained important after the resurgence of union activism in Brazil, because it shifted the focus of discussion on the bargaining table to wage adjustment in excess of the official wage adjustment numbers. The importance of wage policy in affecting wage determination is theoretically examined by solving a right-tomanage model of wage bargaining. The innovation here is to consider the utility associated with the institutional wage as one of the components that form the union's fall-back utility level. Our main finding is that the institutional wage affects the result of the wage bargaining. We show that, in the most plausible case, a rise in the institutional wage raises the bargained wage, even though the effect is ambiguous in general. We conclude by arguing that empirical tests of the importance of wage policy in Brazil should take these theoretical considerations into account, instead of using ad-hoc models of wage determination, as had the previous empirical literature done in Brazil, which in most cases simply tested the null hypothesis of an unitary institutional wage coefficient.

Suggested Citation

  • Gonzaga, Gustavo & Scandiuzzi, João Carlos, 1998. "How Does Government Wage Policy Affect Wage Bargaining in Brazil?," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 18(1), May.
  • Handle: RePEc:sbe:breart:v:18:y:1998:i:1:a:2840
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    References listed on IDEAS

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    1. Holden, Steinar, 1989. "Wage Drift and Bargaining: Evidence from Norway," Economica, London School of Economics and Political Science, vol. 56(224), pages 419-432, November.
    2. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    3. Oswald, A. J., 1995. "Efficient contracts are on the labour demand curve: Theory and facts," Labour Economics, Elsevier, vol. 2(1), pages 102-102, March.
    4. Smith, Russell E., 1988. "Wage indexation, turnover, and nominal-wage changes in Brazilian manufacturing, 1966-1976," Journal of Development Economics, Elsevier, vol. 28(2), pages 159-173, March.
    5. Blanchflower, David G & Oswald, Andrew J & Garrett, Mario D, 1990. "Insider Power in Wage Determination," Economica, London School of Economics and Political Science, vol. 57(226), pages 143-170, May.
    6. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-293, March.
    7. Kidd, David P & Oswald, Andrew J, 1987. "A Dynamic Model of Trade Union Behaviour," Economica, London School of Economics and Political Science, vol. 54(215), pages 355-365, August.
    8. Henry S. Farber & Harry C. Katz, 1979. "Interest Arbitration, Outcomes, and the Incentive to Bargain," ILR Review, Cornell University, ILR School, vol. 33(1), pages 55-63, October.
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    Cited by:

    1. Alejandro Rodríguez Arana, 2004. "Dinámica macroeconómica y la curva de Philips bajo diversos supuestos sobre el mecanismo de ajuste salarial," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 19(2), pages 181-210.

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