Centralization of wage bargaining and the unemployment rate: revisiting the hump-shape hypothesis

Is there a relation between wage bargaining institutions and unemployment? The humpshape hypothesis�, first introduced by Calmfors and Driffill (1988), states that countries with highly centralized and highly decentralized wage bargaining processes have a superior performance in terms of unemployment than countries with an intermediate degree of centralization. Calmfors and Driffill�s results were obtained on a sample including data from 1962 up to 1985. This paper shows that the claimed superiority in terms of unemployment of centralized countries over intermediate ones during the �60s and the �70s depended upon their high levels of government expenditure and public sector employment. The evidence shows that from the beginning of the �80s the expansion of the public sector in centralized countries slowed down considerably and, at the same time, the correlation between the degree of centralization and unemployment weakened. This evidence helps reconcile recent findings of poor correlations between measures of economic performance and indexes of bargaining systems with Calmfors and Driffill�s original results. The paper concludes by questioning the compatibility of the reported evidence with the theoretical framework proposed by CD to explain the hump-shape hypothesis.