Increased Price Markup from Union Coordination – OECD Panel Evidence

Abstract

Although coordination of wage bargaining probably affects entry barriers and competition in product markets, research on price determination has typically not considered such factors. We argue that the price markup depends on wage setting institutions and present empirical evidence in form of estimated price equations in a panel of 15 OECD countries. The estimates show that consumer prices may be as much as 21 percent higher in coordinated compared to uncoordinated countries, solely due to the effect of coordination on the markup. Since other studies find that coordination has a dampening effect on wages, this may explain why there is no clear effect of coordination on unemployment.JEL C23, E31, J51

Equilibrium Unemployment Dynamics in a Panel of OECD Countries

“…The price mark‐up, m q , has received less attention and it is often regarded as a more autonomous parameter than the wage mark‐up. An interesting exception is Bjørnstad and Kalstad (), who use panel data and find that the price mark‐up is significantly higher in countries with a high degree of wage co‐ordination compared with unco‐ordinated countries. This may dampen the negative effect of co‐ordination on unemployment that would otherwise be a consequence of a reduced wage mark‐up.…”

“…In our model, institutions affect unemployment via their impact on the wage and price mark‐up coefficients, and these effects on unemployment can cancel out. Bjørnstad and Kalstad () observe that if the price mark‐up coefficient is positively linked to the degree of co‐ordination, the net effect of increased co‐ordination on unemployment may be ambiguous. Following Bowdler and Nunziata () and Bjørnstad and Kalstad (), we model price formation as a function of wage‐determining factors and find that, indeed, the effect of co‐ordination is positive on the price mark‐up.…”