Collective wage setting when wages are generally binding: an antitrust perspective

This paper explores the anticompetitive effects that wage determination between an employers. association and the industry.s labor union may have when wages are generally binding. It is shown that employers. associations can, under certain circumstances, use generally binding standard wages to raise rivals. costs. In equilibrium, it may be optimal for the labor union to demand a wage rate which is either above or below the entry deterring limit wage. Hence, it might be the case that a strong labor union serves as an efficiency enhancing countervailing power, because it keeps the employers. association from raising the standard wage up to the limit wage. The model is used to explain why both German employers. associations and German labor unions appear to oppose the removal of a specific legal instrument provided for in the German labor law, the so-called Allgemeinverbindlicherklärung (AVE), which makes collectively negotiated employment contracts binding for an entire industry. The entry deterring effect of the AVE suggests that labor market organization is an important determinant of product market competition and should therefore be considered as part of antitrust policies.