Table Of ContentTRADE UNIONS, WAGE FORMATION AND
MACROECONOMIC STABILITY
TOPICS IN CONTEMPORARY ECONOMIC ANALYSIS
Edited by Peter Bohm and Allen V. Kneese
THE ECONOMICS OF ENVIRONMENT
Edited by Jan Herin, Assar Lindbeck and Johan Myhrman
FLEXIBLE EXCHANGE RATES AND STABILIZATION POLICY
Edited by Steinar Str0m and Lars Werin
TOPICS IN DISEQUILIBRIUM ECONOMICS
Edited by Steinar Str0m and Bjorn Thalberg
THE THEORETICAL CONTRIBUTIONS OF KNUT WICKSELL
Edited by Steinar Str0m
MEASUREMENT IN PUBLIC CHOICE
Edited by Lars Matthiessen and Steinar Str0m
UNEMPLOYMENT: MACRO AND MICRO-ECONOMIC
EXPLANATIONS
Edited by Lars Matthiessen
THE IMPACT OF RISING OIL PRICES ON THE WORLD ECONOMY
Edited by Lars Calmfors
LONG-RUN EFFECTS OF SHORT-RUN STABILIZATION POLICY
Edited by Finn R. F!llrsund
TOPICS IN PRODUCTION THEORY
Edited by Finn R. F0rsund and Seppo Honkapohja
LIMITS AND PROBLEMS OF TAXATION
Edited by Lars Calmfors and Henrik Horn
TRADE UNIONS, WAGE FORMATION AND MACROECONOMIC
STABILITY
Series Standing Order
If you would like to receive future titles in this series as they
are published, you can make use of our standing order
facility. To place a standing order please contact your
bookseller or, in case of difficulty, write to us at the address
below with your name and address and the name of the
series. Please state with which title you wish to begin your
standing order. (If you live outside the UK we may not have
the rights for your area, in which case we will forward your
order to the publisher concerned.)
Standing Order Service, Macmillan Distribution Ltd,
Houndmills, Basingstoke, Hampshire, RG212XS, England
TRADE UNIONS, WAGE
FORMATION AND
MACROECONOMIC
STABILITY
Edited by
Lars Calmfors
Associate Professor and Senior Research Fellow
Institute for International Economic Studies
University of Stockholm
and
Henrik Horn
Research Fellow
Institute for International Economic Studies
University of Stockholm
M
MACMILLAN
© The Scandinavian Journal of Economics, 1985, 1986
Softcover reprint of the hardcover 1st edition 1986 978-0-333-40963-3
All rights reserved. No reproduction, copy or transmission
of this publication may be made without written permission.
No paragraph of this publication may be reproduced, copied
or transmitted save with written permission or in accordance
with the provisions of the Copyright Act 1956 (as amended).
Any person who does any unauthorised act in relation to
this publication may be liable to criminal prosecution and
civil claims for damages.
This collection was originally published in
TheScandinavianJournalofEconomics, Vol. 87,1985, No.2
First published in book form 1986 by
TilE MACMILLAN PRESS LTD
Houndmills, Basingstoke, Hampshire RG21 2XS
and London
Companies and representatives
throughout the world
British Library of Cataloguing in Publication Data
Trade unions, wage formation and macroeconomic
stability.-(Topics in contemporary economic
analysis)
1. Economic stabilization 2. Wages 3. Trade
unions
I. Calmfors, Lars II. Hom, Henrik Ill. Series
331.2'15 HB3730
ISBN 978-1-349-08598-9 ISBN 978-1-349-08596-5 (eBook)
DOI 10.1007/978-1-349-08596-5
Contents
Contributors' Affiliations vii
Trade Unions, Wage Formation and Macroeconomic Stability-An
Introduction. By Lars Calmfors . . . . . . . . . . . . . . . 1
Part I. Microeconomic Underpinnings
The Economic Theory of Trade Unions: An Introductory Survey.
By Andrew J. Oswald 18
Comment by George Johnson . . . . . . . . . . . . . . . . . . . . 52
Wages and Employment under Trade Unionism: Microeconomic
Models and Macroeconomic Applications. By John Pencavel 55
Comments by Andrew J. Oswald and Berti/ Holmlund . . . . . 84
Part II. Centralized Wage Setting
Classical Unemployment, Accommodation Policies and the Ad
justment of Real Wages. By Lars Calmfors and Henrik Horn . . 92
Comments by Lars Jonung and Richard Layard 120
Workers versus Government-Who Adjusts to Whom? By Tor
Hersoug . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
Comments by Thorvaldur Gylfason and Henryk Kierzkowski . . . 151
Macroeconomic Stabilization Policy and Trade Union Behavior as
a Repeated Game. By John Driffi/1 . . . . . . . . . . . . . . . . 158
Comments by Stanley Fischer and Matti Pohjola .......... 185
Union Militancy, External Shocks and the Accommodation Dilem-
ma. By Hans Tson Soderstrom . . . . . . . . . . . . . . . . . . 193
Comments by Guido de Bruyne and EdmundS. Phelps ..... 210
vi Contents
Part Ill. Decentralized Wage Setting
Counterinflationary Policy in a Unionised Economy with Non-
synchronised Wage Setting. By Richard Jackman ........ 215
Comments by John Fender and Thorvaldur Gylfason . . . . . . . 237
Dynamics of Unemployment, Vacancies and Real Wages with
Trade Unions. By Christopher Pissarides . . . . . . . . . . . . . 244
Comments by Masahiko Aoki and EdmundS. Phelps ....... 262
Insiders and Outsiders in Wage Determination. By Robert Solow 269
Comments by Henryk Kierzkowski and Dennis Snower ...... 287
Part IV. Empirical Applications
Wage Gaps, Factor Shares and Real Wages. By John McCallum 294
Comment by Eskil Wadensjo . 318
Contributors' Affiliations
Masahiko Aoki Stanford University, Stanford, CA, USA
Lars Calmfors Institute for International Economic Studies,
Stockholm, Sweden
Guido de Bruyne University of Louvain, Belgium
John Driffill University of Southampton, England
John Fender University of Lancaster, England
Stanley Fischer Massachusetts Institute of Technology, Cambridge,
MA,USA
Thorvaldur Gylfason University of Iceland, Reykjavik, Iceland
TorHersoug University of Oslo, Norway
Bertil Holmlund Industrial Institute for Economic and Social
Research, Stockholm, Sweden
HenrikHorn Institute for International Economic Studies,
Stockholm, Sweden
Richard Jackman London School of Economics, London, England
George Johnson University of Michigan, Ann Arbor, MI, USA
LarsJonung University of Lund, Sweden
Henryk Kierzkowski Graduate Institute oflnternational Studies, Geneva,
Switzerland
Richard Layard London School of Economics, London, England
John McCallum University of Quebec, Montreal, Quebec, Canada
Andrew J. Oswald Institute of Economics and Statistics and StJohn's
College, Oxford, England
John Pencavel Stanford University, Stanford, CA, USA
EdmundS. Phelps Columbia University, New York, NY, USA
Christopher Pissarides London School of Economics, London, England
Matti Pohjola University of Helsinki, Finland
Dennis Snower Birkbeck College, University of London, England
Hans Tson Soderstrom Business and Social Research Institute, Stockholm,
Sweden
Robert M. Solow Massachusetts Institute of Technology, Cambridge,
MA,USA
Eskil Wadensjo Institute for Social Research, Stockholm, Sweden
'Irade Unions, Wage Formation and
Macroeconomic Stability-An Introduction*
Lars Calmfors**
Institute for International Economic Studies, Stockholm, Sweden
The process of wage formation is a crucial aspect of the current discussion
about the causes of stagflation. In fact, differences between various policy
prescriptions usually depend on differing assumptions about wage re
sponses. Proposals to reduce unemployment through expansion of mone
tary demand are usually based on assumptions of rigid money wages. In
contrast, recommendations of non-intervention policies often rest on the
opposite assumption of rigid real wages, in which case monetary expansion
will cause inflation but not affect employment.
Unfortunately, our knowledge about wage formation is very incomplete.
The macroeconomic literature abounds with models which contain assump
tions about fixed money or fixed real wages, but these assumptions have
no-or only weak-theoretical underpinnings. The Phillips-curve approach,
which explains wage increases by excess demand in the labor market and
expected inflation, is to a large extent theoretically ad hoc, although it has
proved empirically valuable. Determinants of the speed at which deviations
of actual unemployment from the equilibrium (natural) rate affect wage
inflation are seldom explained. Nor is there always any explanation regard
ing the determinants of the equilibrium rate of unemployment, which is
instead often treated as exogenous.
The macroeconomic literature of the 1960s and 1970s paid little attention
to actual institutions in the labor market and especially to trade unions;
they lived a life of their own in labor economics but were not integrated into
the mainstream of economic theory. This may have reflected the US
dominance in economics. In an economy where trade unions organize only
about 20% of the labor force, it may be reasonable to treat labor markets as
atomistic as a first approximation in macroeconomic analysis. But for
• This issue contains the proceedings from a conference held in Saltsjobaden, Sweden, August
2&-29, 1984. The conference was organized by the Institute for International Economic
Studies, University of Stockholm, and financed by The Bank of Sweden Tercentenary
Foundation.
•• I am grateful for helpful comments from Bertil Holmlund, Seppo Honkapohja, Henrik
Hom, Richard Jackman, Assar Lindbeck, John McCallum, Andrew Oswald, John Pencavel,
Robert Solow, Lars Svensson, Hans SOderstrom and Eskil Wadensjo.
2 L. Calmfors
European countries, where union participation rates are much higher-as
much as 70-90% in the Scandinavian countries, Belgium and Austria, as
discussed by e.g. Faxen (1982)-and where union contracts often cover
unorganized labor as well, neglect of trade unions may be fatal for the
understanding of macroeconomic problems. Of course, it cannot a priori be
ruled out that labor market organizations are only a "veil" and that they
may mimic the behavior of atomistic markets; but if so, this must be shown
and not merely assumed.
Recent years have seen a remarkable growth, pa_rticularly in Europe, of
reseach on trade unions and wage formation. This probably. depends on
several factors. One may be the long-run tendency of nominal wage in
creases in excess of productivity gains in Europe in the 1960s and early
1970s and the inertia of real wages after the oil price shocks. Another factor
is probably the greater belief of economists in general in the applicability of
economic theory. During the last decade there has been a profusion of
models where an increasing number of aspects of human life are explained
in terms of optimizing behavior on the part of individual agents. It is natural
that this tendency also affects work on trade unions and wage setting.
The new literature on wage formation has two main characteristics. First,
it concentrates more on trade unions than on employers. One reason may
be that we know less about union behavior than about the behavior of
profit-maximizing employers. Second, it can be seen as an attempt to find
out how far we can get in this area using conventional assumptions about
maximization of well-defined preference functions under given constraints.
This volume covers four areas. The first is the basic micro theory of trade
union behavior and wage setting, which is treated by Oswald and Pencavel.
The second concerns the interaction between governments and trade un
ions in economies with centralized wage setting. Calmfors & Hom, Her
soug, Driffill, and Soderstrom consider various aspects of this problem.
The third area concerns the effects of trade unions under decentralized
wage setting, as dealt with by Jackman, Pissarides and Solow. The fourth
area covers empirical applications, which are made by McCallum and also
by Pencavel.
I. Microeconomic Underpinnings
Oswald summarizes recent theoretical research on the micro theory of
union behavior, according to which unions care about both (real) wages and
employment. This formulation has either been postulated as a "revealed
preferences description" of union behavior or derived from individual
preferences of union members. In the simplest formulations of the latter
approach, all members of the union are treated alike, and the union's utility
is the expected utility of a representative member. It thus equals a weighted
