Amrita Dhillon and Emmanuel Petrakis

"A Generalized Wage Rigidity Result with Centralized Negotiations"
JEL codes: L13, J31, J51

Abstract: This paper provides an alternative explanation of the empirically observed wage rigidity in industrialized economies. Our explanation is based on the existence of institutions which lead to unions on the one hand and firms on the other, co-ordinating at an industry level on wage bargaining. Our analysis pertains to oligopolistic industries and we study in particular conditions under which the negotiated wage is independent of a number of product market features (such as the number of firms, the degree of product substituability, or the type of market competition). This wage independence property is shown to hold in a broad class of industry specifications widely used in the literature, both when negotiations are conducted over wages alone (Right-to-Manage), and over wages and employment (Efficient Bargains). By implication, the effectiveness of union rent-seeking is seen to increase as the market becomes more competitive since aggregate employment increases.