Pattern wage bargaining represents a system for coordinated wage formation within large sectors of the economy. Wage-leader (aka front-runner) refers to Norwegian export companies that are exposed to international competition. These businesses have less power to mark-up product prices on normal costs, than do firms that operate in more competition-sheltered product markets. In order not to weaken the competitiveness of the export companies, wage formation must therefore contribute to a productivity-adjusted wage-cost level that over time does not deviate too much from that of our trading partners. The wage-leading sector exposed to competition first negotiates wages, which by mutual understanding, becomes a norm for wage growth in other areas of agreement, the so-called sheltered sector. There is considerable consensus about wage-coordination as a condition for economic performance with high employment, economic growth and manageable inflation pressure in Norway over many decades.
The real-world system of pattern wage bargaining is a complex arrangement, which also has institutional aspects. However, in this report we look at a small and stylized model that captures the central mechanism in the wage setting system: coordination. The model has a sector exposed to international competition (the wage-leading sector) and a (sheltered) wage-following sector. The model is dynamic in order to represent both the short-term dependencies (e.g. wage-growth and price adjustments) and potential long-run relationships that stabilize the functional income distribution and relative wages. In this simultaneous and dynamic model, we study how coordi-nated wage formation can have a stabilizing effect on competitiveness and wage shares in the two sectors. It has been beyond the scope of our study to analyze the other impact channels and stabilization mechanisms that are present in the real-word economy, for example monetary policy.
The model’s numerical solutions over many time periods show that coordination of growth in nominal wage and price variables can ensure stability – regardless of the level of unemployment. Dynamic stability requires that firms’ profits have a separate influence on wage growth (also known as ability-to-pay effect). The rate of unemployment, which is a variable in the model, then plays no role for stability or not. The level of unemployment only affects the level of stable competitiveness and, to a limited extent, the level of the stable wage share in the competitive sector. If wage growth, on the other hand, is affected by growth in ability to pay (and not the level of ability-to-pay), the system delivers less coordination in wage formation. Unemployment can then moderate wage growth and contribute to stability in competitiveness and the wage share.
In the pattern-bargaining model with full wage coordination, a permanent shift in the competitive price abroad only has a temporary effect on competitiveness, unemployment, and wage shares. In the model with limited coordination in wage formation (a so-called wage Phillips curve model), a permanent shift in the competitive price abroad produces (long) lasting changes in competitiveness, unemployment, and wage shares.