Topics in IO

Topics in IO

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  Introduction The ModelDecentralized Bargaining Heterogeneous Degree of Centralization Industry-level Bargaining Conclusion National wage bargaining in an internationally integrated product market Giacomo Corneo (1995). European Journal of Political Economy, vol.11, page 503-520 Marko Ledic Topics in IO - Assignment University of Milan
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  Introduction The ModelDecentralized Bargaining Heterogeneous Degree of Centralization Industry-level Bargaining Conclusion Introduction The process of integration of product markets (among countries or regions) influences the strategic decisions made by firms which brings upon a change in national wage setting mechanism as well. The effect of product market integration on the labour market should take into account heterogeneity in the institutional settings, like the degree of centralization in collective bargaining, trade union density, minimum wage, unemployment benefits and the government role in the wage bargaining. Literature that combined the wage bargaining and imperfect competition while assuming a symmetric bargaining games: Dixon (1988), Dorwick (1989), De Fraja (1993).
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  Introduction The ModelDecentralized Bargaining Heterogeneous Degree of Centralization Industry-level Bargaining Conclusion Introduction Corneo (1995) develops a model of integrated product market leaving out the assumption of symmetry. Products are supplied by oligopolistic firms located in different countries. Wage costs of each firm determined by idiosyncratic wage bargaining. The main aim of the model is to investigate: The impact of product market integration on international wage differentials. The form of externalities among countries that affect wage settings. How centralization and coordination of wage bargaining affect employment and social welfare.
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  Introduction The ModelDecentralized Bargaining Heterogeneous Degree of Centralization Industry-level Bargaining Conclusion The Model Model’s assumptions: Homogeneous commodity with a linear inverse demand function p(Q) = a − bQ. There are j = 1, ..., n identical profit maximizing firms that supply the commodity. Firms technology exhibits a CRS with respect to labour and qj = lj where qj is output and lj is employment level. Two countries model: A (with firms j = 1, ..., m) and B (with firms j = m + 1, ..., n). In both countries each worker supplies labour to one of the firms and workers are supplied with one unit of labour. Each firm hire from a continuum of workers of equal size. Workers preferences are given by the indirect utility function Uj = sj (lj )wj + (1 − sj (lj )) ¯wj where sj represents the survival probability and ¯wj represents expected income of a worker who loses his/her job in the firm. Union’s bargaining power, union’s utility and degree of centralization of bargaining power can differ across countries.
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  Introduction The ModelDecentralized Bargaining Heterogeneous Degree of Centralization Industry-level Bargaining Conclusion The Model Model’s assumptions: Wage bargaining is either simultaneous or sequential. The game starts with wage bargaining in each country and then firms simultaneously choose their level of employment which gives the equilibrium output and price. Under the assumption of homogeneous labour institutions across countries, Corneo’s (1995) model transforms into the case of Dowrick (1989) model that can be taken as a benchmark. Equilibrium wage under industry-level bargaining wind∗ = ¯w + γ(a − ¯w) 2 (1) Equilibrium wage under decentralized bargaining wfirm∗ = ¯w + γ(a − ¯w) 2n − γ(n − 1) (2) By comparing these two equilibrium wage levels we see that under industry-level bargaining the equilibrium wage level is lower due to absence of competitive mechanism.
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  Introduction The ModelDecentralized Bargaining Heterogeneous Degree of Centralization Industry-level Bargaining Conclusion Decentralized Bargaining Country Specific Case This section departs from the assumption of institutional symmetry as in the benchmark model and assumes that firm-level bargaining takes place simultaneously in countries A and B. The asymmetry across countries arises from different reservation wage and union bargaining power. The equilibrium wage for firm A and B in the simultaneous game: wfirm∗ A = ¯wA + γA [(a − wA) (2n + γB ) − (wA − wB ) (n − m) (2n − γB n)] (2n + γA) [2n − γB (n − 1)] 2nm (γA − γB ) (3) wfirm∗ B = ¯wB + γB [(a − wB ) (2n + γA) − (wB − wA) (n − m) (2n − γAn)] (2n + γB ) [2n − γA (n − 1)] 2nm (γB − γA) (4) Equations 3 and 4 collapse to equilibrium wage level under decentralized wage bargaining (equation 2) if γA = γB = γ and if wA = wB = ¯w.
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  Introduction The ModelDecentralized Bargaining Heterogeneous Degree of Centralization Industry-level Bargaining Conclusion Decentralized Bargaining - Country specific case Country Specific Case Proposition 1 The wage level in one country is an increasing function of union bargaining power and the reservation wage in both countries. We can notice a positive externality between wage levels in countries A and B. Wage level in any of these two countries arises when the bargaining power of unions increases in one country (due to increasing γ or ¯w). In the case of single product market, this increase in wage will lower the impact of competition for the firms abroad since the later firms will acquire higher wage costs.
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  Introduction The ModelDecentralized Bargaining Heterogeneous Degree of Centralization Industry-level Bargaining Conclusion Heterogeneous Degree of Centralization Synchronized Bargaining In this setting the wage level in country A is determined at industry-level bargaining while in country B the wage level is determined under decentralized bargaining. Equilibrium wage in country A under industry-level bargaining wind−firm∗ A = ¯w + γ(2n + γ)(a − ¯w) Z (5) Equilibrium wage in country B under decentralized bargaining wind−firm∗ B = ¯w + γ[Z + γm(2n + γ)](a − ¯w) [2n − γ(n − m − 1)]Z (6) where Z is a positive constant
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  Introduction The ModelDecentralized Bargaining Heterogeneous Degree of Centralization Industry-level Bargaining Conclusion Heterogeneous Degree of Centralization Synchronized Bargaining Proposition 2 Under synchronized wage setting, wages in the country with industry-level bargaining are higher than in the country with firm-level bargaining. The wage level is lower in the former country then under overall industry-level bargaining (and vice versa). Setting a uniform wage in country A hampers union/firm pairs in lowering wages and therefore the wage in county A will be higher then under decentralized wage bargaining. Decentralized wage setting in country B yields a higher wage.
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  Introduction The ModelDecentralized Bargaining Heterogeneous Degree of Centralization Industry-level Bargaining Conclusion Heterogeneous Degree of Centralization Sequential Bargaining In this setting, first the bargaining process at the industry level happens for country A (leader), then for country B (follower), the wage is bargained at firm-level and at the end we have a Cournot competition in the single product market. Solving the game by backward induction the following results apply: The best response wage-function for the follower in country B wB (wA) = ¯w + γ[a − ¯w + m(wA − ¯w)] 2n − γ(n − m − 1) (7) The equlibrium wage for a leader in country A wind−firm∗ A,leader = ¯w + γ[(2n + γ)(a − ¯w) + γ ¯w(n − m)(n − 2)] 2[(n + 1 − m)(2n − γn + γ) + γm] (8)
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  Introduction The ModelDecentralized Bargaining Heterogeneous Degree of Centralization Industry-level Bargaining Conclusion Heterogeneous Degree of Centralization Sequential Bargaining Proposition 3 Under heterogeneity in degrees of centralization, wages in both countries are higher and industry employment is lower when bargaining is sequential rather than synchronized. In this case there exist a positive externality between the wage level in country A and B. Higher wage can be obtained in country A at the industry-level under simultaneous bargaining (than it was the case for synchronized bargaining) and the same bargaining motives apply for wage bargaining for firms in country B. In sequential bargaining we have a lower level of employment and output, a higher product price than it was the case in synchronized bargaining.
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  Introduction The ModelDecentralized Bargaining Heterogeneous Degree of Centralization Industry-level Bargaining Conclusion Industry-level Bargaining Synchronized Bargaining Assuming that the wage bargaining takes place at the industry-level in both countries, the equilibrium wages are as follows: wind−ind∗ A = ¯w + γ(a − ¯w)[(2(m + 1) + γ(n − m)] 4(n + 1 − m)(m + 1) − γ2m(n − m) (9) wind−ind∗ B = ¯w + γ(a − ¯w)[(2(m + 1) + γ(m)] 4(n + 1 − m)(m + 1) − γ2m2 (10) Proposition 4 Under synchronized national bargaining at the industry-level, the wage level is higher in the larger country. Wages in both countries are lower then in the case of overall industry-level bargaining. In other words, under the integrated product market setting, large countries have the advantage in determining the wage level that can be increased, while small countries are absence of this advantage.
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  Introduction The ModelDecentralized Bargaining Heterogeneous Degree of Centralization Industry-level Bargaining Conclusion Industry-level Bargaining Sequential Bargaining Assuming that the wage bargaining takes place at the industry-level in both countries but country A is the leader and country B is the follower The best response wage-function for the follower in country B wB (wA) = ¯w + γ[a − ¯w + m(wA − ¯w)] 2(m + 1) (11) The equlibrium wage for a leader in country A wind−ind∗ A,leader = ¯w + γ(a − γ)[(2(m + 1) + γ(n − m)] 2(n + 1 − m)(m + 1) − γm(n − m) (12) Proposition 5 Under national bargaining at the industry-level, wages in both countries are higher and industry employment is lower, when bargaining is sequential rather than synchronized. Comparing the equations 9 and 10 with the equations 11 and 12 we can notice that sequential bargaining yields a higher wage level for both countries that it was the case under synchronized bargaining(note that γ ∈ (0, 1)).
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  Introduction The ModelDecentralized Bargaining Heterogeneous Degree of Centralization Industry-level Bargaining Conclusion Conclusion Corneo’s (1995) model indicated the possible externalities that might emerge on integrated product markets from the heterogeneity in institutional settings between countries. One implication of the following model is that even after integration of product market, the wage differentials are still pertinent as a result of heterogeneous labour market institutions across countries. When bargaining takes place at the industry-level and when a country is characterized by ”stronger” unions, then the equilibrium wages are higher and equilibrium employment is lower then it would be the case for a country with firm-level bargaining. The model showed that synchronized wage bargaining across countries would imply a lower wage and higher employment then in sequential bargaining case.