Academic journal article The Economic and Labour Relations Review : ELRR

Centralised vs. Decentralised Wage-Setting Systems and Capital Accumulation-Evidence from OECD Countries, 1960-1990

Academic journal article The Economic and Labour Relations Review : ELRR

Centralised vs. Decentralised Wage-Setting Systems and Capital Accumulation-Evidence from OECD Countries, 1960-1990

Article excerpt

1. Introduction

The radical industrial relations legislation of the Kennett government designed to curb union power and the industrial relations policy contained in the now discarded Fightback package of the Federal Opposition have generated intense debate about the relative merits of centralised versus decentralised wage bargaining systems. These developments have received added impetus from New Zealand's tough industrial relations legislation which Jias its antecedent in the Thatcher experiments of the 1980s.

Critics of the centralised wage-fixing mechanism argue that it introduces rigidity in the labour market. In short, by emphasising uniformity and across the board wage increases, it reduces the dispersion in relative wages and hence leads to resource misallocation. A corollary of across the board wage decision is that it disregards productivity differentials and thus is more inflationary. The arguments against centralised wage-fixing mechanisms have also encompassed the question of unionisation. Strong union power is seen as an impediment for enterprise (decentralised) bargaining and hence for all the woes associated with centralised bargaining. Furthermore, according to the insider-outsider theory, the exercise of union power can add to the woes by preventing the wage rate from adjusting downward at the time of recession as unemployed (outsiders) become irrelevant in the wage setting process.

However, these arguments are countered by making a distinction between the ways in which union power is used. It is claimed that high unionisation combined with high coordination can be a good mix. The argument goes as follows: the greater the 'consensus' between labour and firms with shared perspective on the goals of economic activity, the greater is the likelihood that highly coordinated and centralised wage negotiations will generate more disciplined and responsible behaviour. What follows is that centralised wage-fixing system leads to better macroeconomic performance both in terms of inflation rates and unemployment.

Most of the theoretical and empirical works on this debate concentrated on current macroeconomic performance in terms of employment and inflation. There are, however, a few works which regard wage bargaining as a dynamic game. They extent the conflict over the distribution of current income to incorporate intertemporal decisions by both workers and capitalists. Following the lead from this literature this paper shows that the countries with consensus based centralised or 'corporatist' wage negotiations system perform better in terms of the investment rate. The paper begins with a brief survey of cross-country evidence on centralised wage bargaining and macroeconomic performance in Section n. Section in provides theoretical arguments. The empirical supporting evidence from the OECD countries are summarised in Section IV. Section V contains the concluding remarks.

2. Corporatism and Macroeconomic Performance

Reflecting on the current debate on industrial relations, Victor Argy (1992, pp 239-40) notes that '[o]ne of the most perplexing aspects of the debate over enterprise bargaining is its disregard of overseas experience ... It is almost as if Australia had invented the term enterprise bargaining; yet ... enterprise bargaining has been in place for some time in France, the United Kingdom, Italy, Switzerland, the United States, Canada and Japan, a group of countries with widely divergent macroeconomic performances. Can we learn anything from this experience?'

The past studies of wage bargaining systems and macroeconomic performance show that in general the more corporatist economies perform better (Barber and McCaUum, 1982; McCallum, 1983,1986; Schott, 1984; Bean, Layard and NickeU, 1986; Bruno and Sachs, 1985; OECD, 1979a, 1988; Metcalf, 1987; Newell and Symons, 1987). The OECD which has been often highly critical of the Swedish style centralised wage-setting system did not hesitate to point out that 'responsible trade union behaviour has been a decisive factor' for a 'marked improvement in economic performance' (OECD, 1979b, p. …

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