INSIDER FORCES AND WAGE DETERMINATION

The persistence of high wage increases in Britain over the last six years despite record levels of unemployment has been the subject of much recent speculation. The general idea here is the following. Suppose there is an autonomous gain in labour productivity. If the labour market is competitive, the firm will expand output and employment at the given wage. However, under insider wage setting there will be a tendency for the productivity gain to be captured in the form of higher wages. Under these circumstances the incentive for the firm to expand output and employment is much reduced. Similar remarks apply to an increase in the demand for the firm's product. Our first purpose is to try and pin down this effect with some precision. A second issue of some interest is the question of what actually determines insider power. The third issue we consider is the importance of outside labour market conditions in wage bargaining. In section I we provide a brief discussion of the theoretical background and then in section II we discuss our empirical specifications, data and results. Finally, we summarise our conclusions. -from Authors