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Wage Interactions: Comparisons or Fall-back Options?


  • 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.

Suggested Citation

  • Jennifer Smith, 1995. "Wage Interactions: Comparisons or Fall-back Options?," Bank of England working papers 37, Bank of England.
  • Handle: RePEc:boe:boeewp:37

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    References listed on IDEAS

    1. 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 103-128, February.
    2. Clark, Simon, 1991. "Inventory Accumulation, Wages, and Employment," Economic Journal, Royal Economic Society, vol. 101(405), pages 230-238, March.
    3. Brown, William & Walsh, Janet, 1991. "Pay Determination in Britain in the 1980s; the Anatomy of Decentralization," Oxford Review of Economic Policy, Oxford University Press, vol. 7(1), pages 44-59, Spring.
    4. Ingram, Peter N, 1991. "Ten Years of Manufacturing Wage Settlements: 1979-89," Oxford Review of Economic Policy, Oxford University Press, vol. 7(1), pages 93-106, Spring.
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    Cited by:

    1. Camarero, Mariam & D'Adamo, Gaetano & Tamarit, Cecilio, 2014. "Wage leadership models: A country-by-country analysis of the EMU," Economic Modelling, Elsevier, vol. 44(S1), pages 2-11.
    2. repec:onb:oenbwp:y::i:153:b:1 is not listed on IDEAS
    3. Tomohara, Akinori & Takii, Sadayuki, 2011. "Does globalization benefit developing countries? Effects of FDI on local wages," Journal of Policy Modeling, Elsevier, vol. 33(3), pages 511-521, May.
    4. Knell, Markus & Stiglbauer, Alfred, 2009. "The impact of reference norms on inflation persistence when wages are staggered," Working Paper Series 1047, European Central Bank.
    5. Stoyanov, Andrey & Zubanov, Nikolay, 2014. "The distribution of the gains from spillovers through worker mobility between workers and firms," European Economic Review, Elsevier, vol. 70(C), pages 17-35.
    6. Latreille, Paul L & Manning, Neil, 2000. " Inter-industry and Inter-occupational Wage Spillovers in UK Manufacturing," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(1), pages 83-99, February.
    7. Andy Haldane & Bennett McCallum & Chris Salmon, 1996. "Base Money Rules in the UK," Bank of England working papers 45, Bank of England.
    8. Panos, Georgios A. & Theodossiou, Ioannis, 2010. "Unionism and Peer-Referencing," SIRE Discussion Papers 2010-122, Scottish Institute for Research in Economics (SIRE).
    9. Ascari, Guido & Garcia, Juan A., 2004. "Relative wage concern: the missing piece in the contract multiplier?," Research in Economics, Elsevier, vol. 58(4), pages 343-369, December.
    10. Marco Bianchi, 1996. "A Comparison of Methods for Seasonal Adjustment of the Monetary Aggregates," Bank of England working papers 44, Bank of England.
    11. Anthony Yates, 1998. "Downward nominal rigidity and monetary policy," Bank of England working papers 82, Bank of England.
    12. Stoyanov, Andrey & Zubanov, Nick, 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).
    13. Francis Breedon & Ian Twinn, 1995. "Valuation of underwriting agreements for UK rights issues: evidence from the traded option market," Bank of England working papers 39, Bank of England.
    14. Panos, Georgios & Theodossiou, Ioannis, 2010. "Unionism and Peer-Referencing," Stirling Economics Discussion Papers 2010-03, University of Stirling, Division of Economics.
    15. Stoyanov, A. & Zubanov, N.V., 2012. "Productivity Gains from Worker Mobility and their Distribution between Workers and Firms," ERIM Report Series Research in Management 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.

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