1 9. Jahrgang (1 993), Heft 4 Wirtschaft und Gesellschaft 
If wages are set at the level of an industry, however, then Tf > Tf* and 
(} < 1 which implies that h < 1 .  In this case, each union knows that an in­
crease in its nominal wage will increase its product price to a greater ex­
tent than it will raise the cost of living. The union is less sensitive to em­
ployment loss than with either purely local wage setting or fully centra­
lized wage setting. 
The important difference here between different degrees of centraliza­
tion is the ability of each union to increase its real consumption wage 
without an equivalent increase in the real product wage in its sector. At 
intermediate levels of centralization, each union is able to pass some of 
the cost of a wage increase on to others through a higher product price, 
rather than bearing all of the cost itself in the form of lower employment. 
Since the cost of a wage increase is reduced at intermediate levels of 
centralization, unians choose higher wages. However, one union's pro­
duct price increase is another union's consumer price increase. When all 
unians raise nominal wages, all prices rise and the result is higher real 
wages (whether in terms of the price of output or of consumption) and 
lower employment than would result from either purely local bargaining 
or wage bargaining that was centralized at the national level. The cen­
tral result is that the relationship between wages and bargaining level is 
hump-shaped with both very decentralized and highly centralized bar­
gaining systems producing greater wage restraint and lower unemploy­
ment than bargaining systems in between (5) .  
According to the model presented so far, either extreme of very decen­
tralized or completely centralized wage setting is equally good. If the as­
sumption of a completely closed economy is relaxed, however, then even 
perfectly centralized bargaining produces less wage restraint than local 
bargaining (6). The reason is that the purest form of centralization 
within national borders is still incomplete in an open economy. A wage 
increase in all sectors of an open economy can raise the real exchange 
rate (i. e. , the relative price of non-traded goods) thereby raising the real 
consumer wage more than the real product wage in the non-traded goods 
sector. This dampens the employment loss that results from a wage in­
crease at the national level. In an open economy, purely local bargaining 
results in lower wage demands than complete centralization. 
In contrast, if the assumption of perfect competition is relaxed, then 
highly centralized bargaining produces greater wage restraint than pu­
rely local bargaining. If individual firms have market power, then in­
creased wage costs will be passed on to prices to some extent even with 
firm-level bargaining (7). Thus, in open economies in which some firms 
are imperfectly competitive, the ranking of local and national bargain­
ing in terms of wage militancy is no Ionger clear. What remains is the 
conclusion that unions' wage demands are highest at the level of wage 
setting that corresponds to the level of maximum divergence between the 
effect of a wage increase on the real consumer wage-which the union 
wants to increase-and on the real product wage-which the union wants 
to prevent from rising. 
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