Wage Bargaining, Privatisation, Ability to Pay, andOutside Options – Evidence from Hungary

This paper examines the determinants of short-term wage dynamics, using asample of large Hungarian companies for the period of 1996-1999. We test thebasic implications of an efficient contract model of bargaining between theincumbent employees and the managers, which we are unable to reject. Inparticular, there are structural differences between the ownership sectorsconsistent with our prior knowledge on relative bargaining strength andunionisation measures. Stronger bargaining position of workers leads to higherability to pay elasticity of wages, and lower outside option elasticity. Ourresults indicate that while bargaining position of workers in domesticprivatised firms may be weaker than in the state sector, the more robustdifference relate to state sector workers versus the privatised firms with themajority foreign ownership.We examine several extensions. We augment the bargaining specification bycontrols related to workers’ skills and find that the basic findings are robust tothat. We take a closer look at the outside options of the workers. We find someinteractive effects, where unemployment modify the impact of availability ofrents on wages. We interpret our results as an indication that bargaining powerof workers may be affected by changes in their outside options. We alsoexperiment with one concise indicator of reservation wage which is closest tothe theoretical model specification and combines sectoral wages,unemployment benefits and regional unemployment levels,. We found thatmeasure performing well.Finally, we found that while responsiveness of wages towards ability to pay ishigher in the state sector, variation in wage dynamics is lower. This mayindicate some wage smoothing in the state sector, consistent with thepreferences of employees....