Job
Creation and Job Destruction with
Local and Centralized Wage-Setting
Karl
Ove Moene and 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.
Karl Ove Moene,
Department of Economics, University of Oslo Michael Wallerstein, Department
of Political Science, Northwestern University
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