Internal and External Forces in Sectoral Wage Formation: Evidence From the Netherlands

Abstract

The purpose of this paper is to investigate the relative importance of internal (sector‐specific) and external (labour market) forces in sectoral wage formation in the Netherlands (1967–90). The results show that wages are largely determined by external forces, although internal forces are significant as well. The impact of the number of insiders, which plays a role in unemployment persistance, is not significant. Separate estimation results show that the impact of internal forces and of unemployment is weaker in the industrial sectors than in the service sectors. This casts doubt on the presumption that insider power increases the impact of internal forces on wage formation.

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“…The results of the panel estimations for the full sample reveal that external factors, primarily the wage dynamics in other sectors, play a comparatively more important role than sector-specific factors in the wage formation in individual sectors. This is in line with the findings of related research, among others Graafland and Lever (1996), or Stockhammer and Onaran (2009). The results for different subsamples are characterized by a large degree of heterogeneity.…”

“…When a macroeconomic wage variable is used to capture external factors, these studies can be interpreted as a test of inter-sectoral wage linkages. For example, using data for the Netherlands, Graafland and Lever (1996) explore the relative importance of internal and external determinants of sectoral wages and find that the latter dominate. They interpret the strong influence of the macro wage on sectoral wages as evidence of the important role of wage leadership patterns.…”

“…Thus, their basic model, with real wage growth as dependent variable, would imply using only the lagged dependent variable, alternative (macroeconomic) wage and labour productivity variable. 9 The same set of variables (except for the lagged dependent variable) is included in the specification used by Graafland and Lever (1996) who adopt the empirical approach from Nickel and Wadhwani (1990), and which is derived with a reference to the right-to-manage bargaining model. Graafland and Lever (1990) classify the explanatory variables into groups of internal (or sectoral) and external factors in wage formation.…”

“…Growth in the weighted average real wage in sectors other than i (or in other groups of sectors) instead of macroeconomic wage is used to avoid the potential endogeneity problem that would arise if wage growth in sector i were to significantly affect the growth of the macroeconomic wage (or of the weighted average wage for groups of sectors). The change in the unemployment rate, which should also capture external forces affecting wage formation by representing the labour market conditions (as in Graafland and Lever, 1996) is denoted by Δu t . No other sector-invariant variables are used, since the short-time dimension of the panel (only eight observations over time, as two are lost due to differencing and lagging) does not allow to reliably differentiate between the effects of more cross-sectionally invariant variables (Graafland and Lever, 1990, face a similar problem but do add the replacement ratio variable in some specifications).…”

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“…This is based on empirical findings of sectoral wages in the Netherlands by Graafland and Lever (1996). In the macro wage equation, the institutional variables, T a , T m and RR are computed as averages for all workers.…”