European wage co-ordination: Nightmare or dream to come true?

Abstract:

This paper analyses recent trends in wage bargaining institutions in Europe to explain the gradual deterioration in the bargaining position of trade unions. It appears that the integration of European economies is an important factor. This raises the question whether trade unions will respond by co-ordinating their wages internationally. Our conjecture is that the opportunities for wage co-ordination are not very strong. This is because of the numerous obstacles associated with heterogeneous structures in wage setting in the EU. Softer co-ordination, e.g. in the form of information exchange or agreements on common rules in wage setting, is more likely to occur and has already been introduced in some cases. If stronger forms of international wage co-ordination would take off, perhaps in the longer term, this would strengthen the bargaining power of trade unions relative to firms. The implications for equilibrium unemployment are ambiguous. On the one hand, higher bargaining power raises wages and thereby unemployment. On the other hand, it reduces unemployment by better incorporating the response of the ECB to wage demands. Another consequence of stronger forms of international wage co-ordination may be that the absorption of asymmetric shocks in the EMU gets more problematic. In that case, wage co-ordination may turn into a nightmare as it hampers a crucial stabilisation mechanism in the EMU.