Centralized vs. Decentralized Wage Formation: The Role of Firms' Production Technology

26 Pages Posted: 14 Jun 2014

See all articles by Boris Hirsch

Boris Hirsch

University of Erlangen-Nuremberg

Christian Merkl

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg; IZA Institute of Labor Economics

Steffen Müller

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg; Halle Institute for Economic Research

Claus Schnabel

University of Erlangen-Nuremberg; IZA Institute of Labor Economics

Abstract

This paper is the first to show theoretically and empirically how firms' production technology affects the choice of their preferred wage formation regime. Our theoretical framework predicts, first, that the larger the total factor productivity of a firm, the more likely it is to opt for centralized wage formation where it can hide behind less productive firms. Second, the larger a firm's scale elasticity, the higher its incentive to choose centralized rather than decentralized wage setting due to labor cost and straitjacket effects. As firms in Germany are allowed to choose their wage formation regime, we test these two hypotheses with representative establishment data for West Germany. We find that establishments with centralized bargaining agreements indeed have economically and statistically significantly larger total factor productivities and scale elasticities than comparable establishments outside the centralized bargaining regime.

Keywords: collective bargaining, bargaining coverage, Germany

JEL Classification: J50

Suggested Citation

Hirsch, Boris and Merkl, Christian and Mueller, Steffen and Schnabel, Claus, Centralized vs. Decentralized Wage Formation: The Role of Firms' Production Technology. IZA Discussion Paper No. 8242, Available at SSRN: https://ssrn.com/abstract=2450433

Boris Hirsch (Contact Author)

University of Erlangen-Nuremberg ( email )

Schloßplatz 4
Erlangen, DE Bavaria 91054
Germany

HOME PAGE: http://www.arbeitsmarkt.wiso.uni-erlangen.de/english/hirsch_e.htm

Christian Merkl

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg

Schloßplatz 4
Erlangen, DE Bavaria 91054
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Steffen Mueller

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg ( email )

Schloßplatz 4
Erlangen, DE Bavaria 91054
Germany

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Claus Schnabel

University of Erlangen-Nuremberg ( email )

Institut für Wirtschaftsforschung
Lange Gasse 20
D-90403 Nuernberg
Germany
+49 911 5302 330 (Phone)
+49 911 5302 721 (Fax)

HOME PAGE: http://https://www.arbeitsmarkt.rw.fau.de/english-version/staff/prof-dr-claus-schnabel/

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

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