5 - Wage differentials and rent sharing

Summary

Introduction

As discussed in chapter 1, interest in interindustry differentials was revived by the Krueger and Summers (1988) paper. But the stability of such differentials had certainly not gone unnoticed before. The OECD Employment Outlook devoted a chapter to it in 1984 (OECD, 1984b), drawing attention to stability of the differences as well as differences between countries. These differentials are an anomaly in simple Walrasian models. The market should compete away all pay differentials for equally skilled workers. Even more remarkably, our results in chapter 1 show that the magnitude of the industry differentials is highly correlated with the degree of corporatism in wage setting in a country. Countries with centralized institutions have smaller industry differentials than those with decentralized institutions.

In this chapter, we consider an explanation for this pattern. When workers capture part of the rents of the firm, industries with high rents pay higher wages than industries with lower rents. Differentials in rents across industries would therefore be an explanation for differentials in wages in a given country. When workers' share in the rents differs across countries, this would explain the variation in industry differentials across countries. This is consistent with the theoretical model set out in chapter 2. Corporatist institutions allow a transfer of the task of adjusting nominal contracts to aggregate shocks to higher-level organizations. Because contract renegotiation is accomplished or supervised by higherlevel organizations, local bargaining power of the union is far less relevant, and there is less scope for sharing in local rents.