Price and Wage Setting in an Integrating Europe

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Price and Wage Setting in an Integrating Europe

• NBB Colloquium, 13-10-2006
• F. Abraham, J. Konings, S. Vanormelingen
• LICOS and Faculty Economics and Management
• KULeuven

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Motivation

• Accelerated process of economic integration
• Euro
• Enlargement
• China in WTO
• China and India new world powers
• Internationalization of production outsourcing,
  FDI, offshoring
• Changing trade pattern towards low wage regions
  may have substantial effects on Western product
  and labor markets that are heavily unionized

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Trend trade and production
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Import Penetration according to Region
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Outsourcing
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Motivation continued

• International trade matters for labor markets
• Rodrik Union bargaining power weakens as
  substitutability of workers increases
• Outside options change
• Spillovers between product and labor markets
  (Konings and Walsh, 1994 Abraham and Konings,
  1999)
• Impact depends on structural rigidities and in
  particular on how price and wage setting
  mechanism works (Blanchard and Giavazzi, 2003)

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Contributions

• Estimate impact of globalization on both
  price-cost margins and union bargaining power
• Globalization is broadly defined
• ?import penetration according to region of origin
• Outsourcing
• Foreign ownership (international rent sharing)

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Structure

• Background Model (Blanchard)
• Data
• Estimation
• Results
• Conclusion

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A Simple Framework of product and labor market
interactions

• Wage Setting WPF(u,Z)
• Price Setting P(1µ)W
• How does economic integration in the product
  market spill over to the labor market?
• ? more product varieties (Krugman)
• ? market shares of domestic firms fall
• Then µ falls
• Labor Market to Product Market?
• ? Outside options bargaining power falls, wage
  curve shifts in.

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Interaction between labor market and product
market
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Estimation

• Hall Approach

• Production Function

• Union Bargaining

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Equation that will be estimated
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Mark-up and bargaining power for manufacturing as
a whole
Robust standard errors in parentheses
significant at 5 significant at 1
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Mark-up per NACE 2 digit sector
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Union bargaining power per NACE 2 digit sector
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Determinants bargaining power and mark-up
Robust standard errors in parentheses
significant at 5 significant at 1
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Imports according to region of origin
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What about outsourcing?

• Outsourcing should increase rents, because of
  gains in efficiency (learning effects, variety
  effects) (Amiti and Konings, 2005) ? also
  bargaining power should go up.
• Kramarz (2003) Hold up since outsourcing fixes
  quantities and prices for a period of between 6
  months to a year.
• On the other hand, the option of outsourcing
  increases the threat point of the firm, which
  could lower bargaining power (substitution
  possibilities go up).
• Measure Share of imported intermediate inputs in
  total intermediate inputs used (I/O tables 1995
  and 2000).

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Effects of outsourcing
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Conclusion

• Union power and mark-ups are positively related
• Import penetration reduces mark-ups and
  bargaining power
• This effect is strongest for imports that come
  from the low wage countries
• Outsourcing tends to have a positive effect on
  mark-ups and bargaining power