Journal Issue
Working Paper Summaries (WP/93/1 - WP/93/54)

Summary of WP/93/25: “Centralized Bargaining, Efficiency Wages, and Flexibility”

International Monetary Fund
Published Date:
August 1993
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Until now, “wage bargaining” literature has focused primarily on macroeconomic outcomes. This paper, in contrast, examines the micro-economic issues of wage bargaining, which have received scant attention to date. Specifically, the paper uses an efficiency wage model with insider-outsider features to appraise the following questions: (a) under what conditions is centralized wage bargaining more profitable than decentralized bargaining for an individual firm? (b) what are the characteristic features of firms that prefer decentralized to centralized bargaining? and (c) has the proportion of firms that prefer decentralized to centralized bargaining been increasing or decreasing over time?

The paper provides useful theoretical insights into the issues involved in shifting from centralized to decentralized wage bargaining in the Swedish case. It concludes that (a) both high-technology and low-technology firms will increase their profitability by shifting from centralized to decentralized bargaining; (b) firms in the “intermediate” technology range may not benefit by moving from centralized to decentralizec bargaining; and (c) given the recent shift to more flexible work practices that characterize the “post-Fordist” environment, firms may prefer decentralized wage bargaining. That is, the pressure to decentralize wage bargaining, as evidenced recently in Sweden, may be based on objective criteria. Simulations are carried out to illustrate and reinforce these theoretical results.

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