Wage Bargaining Institutions and the Euro-Crisis

Wage bargaining institutions and wage setting practices have come under attack in the current Euro-crisis. The slippage in competitiveness in Southern Europe, but not only there, in comparison to Germany during the past ten years has been attributed to insufficient flexibility in wage setting institutions and practices. This inflexibility is equated with too much centralisation, the use of indexation clauses and the lack or limited use of opening or hardship or jobs for wages clauses that became so widely diffused in German industry. This somewhat simplified story, for which there exists only scant econometric evidence, underlies the policy recommendations of the Euro-Plus-Pact signed by 25 EU member states in March 2011.

Based on the author’s current (non-resident) fellowship with DG Ecfin at the European Commission the paper presents a critical review of the evidence. First, as a further development and refinement of the author’s ICTWSS database (http//:www.uva-aias.net), it presents a new set of data on decentralisation of wage bargaining in multi-level systems. Second, it tests the hypothesis that, in multi-level systems, the extent of decentralisation depends on the existence of trust between unions and employers, harnessed by union or worker representatives that can act independently from the firms and by peace clauses that can be made to stick. Thirdly, it tests the hypothesis that there is a positive relation between decentralisation and competitiveness. Fourthly, the paper evaluates the dynamics of change in wage bargaining institutions in relation to the crisis and external constraints generated by membership of the EMU.