How bargaining mediates wage determination: An exploration of the parameters of wage functions in a pooled time-series cross-section framework

The process of wage determination is mediated by the institutional framework of the labor market. Bargaining systems differ not only in their mode of governance, but also in the way that wages are related to unemployment, inflation, and productivity growth. Based on annual data for the period 1971-1996 from 20 OECD countries, the paper uses a pooled time-series cross-section model to show that bargaining modes affect the speed at which wages are adjusted and the extent to which macroeconomic factors affect wages. Contrary to the expectations of mainstream economics, uncoordinated bargaining does not turn out to be the most flexible mode. Pattern setting and peak-level coordination, if legally enforceable, are modes of labor market governance that are at least as flexible and responsive, if not more so. Hence these labor market institutions cannot be blamed for excessive rigidity.