Firm Heterogeneity and Wages Under Different Bargaining Regimes: Does a Centralised Union Care for Low-productivity Firms?

In recent decades, German industry-level bargaining has often been blamed for the deterioration of firms’ competitiveness, as centrally negotiated wages are perceived to be particularly harmful to those firms who perform below the industry average. However, the extent to which a uniform industry wage deteriorates the position of less successful firms ultimately depends on the degree to which a centralised union internalises negative implications for below-average performing firms. If, for example, an industry-level union takes into account the job losses a wage increase produces in less successful firms, this may induce the union to moderate its wage demands. Clearly, the need to do so should critically depend on the variability in firm performance within the industry under consideration. As there is surprisingly little evidence on how the extent of firm heterogeneity affects centrally negotiated union wages, the aim of this paper is to study the relationship between wages and the degree of firm heterogeneity in a given industry under different wage setting structures. To provide some theoretical guidance, we first set up a simple theoretical model that analyses the sensitivity of wages to the variability in productivity conditions in a unionsised oligopoly framework. The model distinguishes centralised and decentralised wage determination. The theoretical results predict wages to be negatively associated with the degree of firm heterogeneity under centralised wage-setting, as unions internalise negative externalities of a wage increase for low-productivity firms. We test this prediction using a linked employer-employee panel data set from the German mining and manufacturing sector. Consistent with our hypotheses, the empirical results suggest that under industry-level bargaining workers in more heterogeneous sectors receive lower wages than workers in more homogeneous sectors. In contrast, the degree of firm heterogeneity is found to have no negative impact on wages in uncovered firms and under firm-level contracts.

Gürtzgen, Nicole (2008), Firm Heterogeneity and Wages Under Different Bargaining Regimes: Does a Centralised Union Care for Low-productivity Firms?, ZEW Discussion Paper No. 08-130, Mannheim.