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Job Creation and Job Destruction with Local and Centralized Wage-Setting

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  • Karl Ove Moene
  • Michael Wallerstein

Abstract

We investigate the effects of the compression of wage differentials through centralized wage-setting in a context where growth depends on the continual reallocation of labor from older, less productive plants to new, more productive plants. We first compare plant-level and centralized wage bargaining in a unionized economy with homogeneous workers. With plant- level bargaining, the wage rate varies according to the productivity of the plant. With industry-level bargaining, the wage in all plants depends on the average productivity in the industry. As a consequence, plant-level bargaining prolongs the life of existing plants but may reduce the entry of new plants in comparison to centralized bargaining. Second, we derive wage differentials under different wage-setting institutions when workersÕ quality varies. We show that (a) competitive wage-setting is efficient but inegalitarian in that wage differentials exceed the underlying quality differentials among workers and (b) that wage compression through centralized bargaining can result in higher profits and higher entry than either decentralized bargaining or a competitive labor market.

Suggested Citation

  • Karl Ove Moene & Michael Wallerstein, "undated". "Job Creation and Job Destruction with Local and Centralized Wage-Setting," IPR working papers 96-13, Institute for Policy Resarch at Northwestern University.
    • Handle: RePEc:wop:nwuipr:96-13
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    Cited by:

    1. Wolfgang Scheremet & Hans Werner Busch & Hartmut Seifert, 2001. "Will new wage-rate models create jobs?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 54(17), pages 03-10, October.
    2. Forslund, Anders & Lindh, Thomas, 2004. "Decentralisation of bargaining and manufacturing employment: Sweden 1970-96," Working Paper Series 2004:3, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    3. Karl Ove Moene & Michael Wallerstein, 1995. "Solidaristic Wage Bargaining," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 22, pages 79-94.

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