Pattern Bargaining and Wage Leadership in a Small Open Economy

Abstract

Pattern bargaining where the tradables (manufacturing) sector acts as wage leader is a common form of wage bargaining in Europe. Our results question the conventional wisdom that such a bargaining set-up produces wage restraint. We find that all forms of pattern bargaining give the same macroeconomic outcomes as uncoordinated bargaining under inflation targeting and a flexible exchange rate. Under monetary union (a fixed exchange rate) wage leadership for the non-tradables sector is conducive to wage restraint and high employment, whereas wage leadership for the tradables sector is not. Loss aversion and comparison thinking in wage setting, where unions evaluate the utility of the wages of their members relative to a wage norm, may lead the follower to set the same wage as the leader. Such equilibria can arise when the leader sector is the smaller sector and promote high employment.

Wage‐setting coordination in a small open economy*

“…Wages are bargained by unions that are large enough to influence the aggregate economy. In an open economy context, the conventional wisdom has been that the export sector unions should have a leading role in wage formation (Calmfors and Seim, 2013). In practice, this form of coordination has been most notably established in Norway, Sweden, and Germany.…”

“…In each sector, there is one labour union that sets the wages. The setting is similar to that in the study by Calmfors and Seim (2013), which examines pattern bargaining in a static framework. The economy in this model is a member of a monetary union, and, as in Galí and Monacelli (2008), it is assumed that a monetary union consists of a continuum of small economies for which the union-wide aggregate variables are exogenous.…”

“…I study how the coordination of wage-setting alters steady-state allocations and the adjustment to shocks. Similarly to Calmfors and Seim (2013), I examine pattern wage-setting as a Stackelberg game and uncoordinated wage-setting as a Nash game. In addition, I study coordination with a wage norm, where the wage set by the leader is imposed on the follower.…”

“…The steady-state analysis in this study corresponds to the analysis in the study by Calmfors and Seim (2013). However, I allow for a richer model and study dynamic adjustments to shocks.…”

“…With this richer model, I can analyse how specific factors in the economic environment influence the wage-setting by unions. Calmfors and Seim (2013) question the conventional wisdom that tradeable sector wage leadership leads to best economic performance. They find that non-tradeable sector wage leadership leads to greater wage restraint and higher employment than uncoordinated bargaining in a monetary union environment.…”