Job Creation and Job Destruction with Local and Centralized Wage-Setting

Karl Ove Moene and Michael Wallerstein

IPR working papers from Institute for Policy Resarch at Northwestern University

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.

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