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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