Scandinavian Working Papers in Economics

Seminar Papers,
Stockholm University, Institute for International Economic Studies

No 760: Pattern Bargaining and Wage Leadership in a Small Open Economy

Lars Calmfors () and Anna Larsson ()
Additional contact information
Lars Calmfors: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden
Anna Larsson: Department of Economics, Stockholm University, Postal: Stockholm University, S-106 91 Stockholm, Sweden

Abstract: Pattern bargaining where the tradables (manufacturing) sector acts as wage leader is a common form of wage bargaining in Europe. Our results question the conventional wisdom that such a bargaining set-up produces wage restraint. We find that all forms of pattern bargaining give the same macroeconomic outcomes as uncoordinated bargaining under inflation targeting and a flexible exchange rate. Under monetary union (a fixed exchange rate) wage leadership for the non-tradables sector is conducive to wage restraint and high employment, whereas wage leadership for the tradables sector is not. Loss aversion and comparison thinking in wage setting, where unions evaluate the utility of the wages of their members relative to a wage norm, may lead the follower to set the same wage as the leader. Such equilibria can arise when the leader sector is the smaller sector and promote high employment.

Keywords: pattern bargaining; wage setting; inflation targeting; monetary regimes

JEL-codes: E24; J50

44 pages, August 7, 2009

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