3. The effect of regulation on wages

Our research project aims to analyse how labour and product market regulations interact to affect wages. This will be done by studying, with the ESES, industry wage differentials and their changes between 1995 and 2002 in European countries. The ESES will in the first place allow to estimate industry wage differentials by controlling for workers' observable characteristics (e.g. education, age, tenure, sex, etc.) and thus to quantify the share of the overall wage differentials by sector that is due to workers' heterogeneity. Secondly, it will enable to compute the wage differential due to firms' heterogeneity (e.g. size, location, etc.). Further, we will try to investigate the potential impact of restricted competition in the product and labour markets on the distribution of wages, taking into account variations in these regulations that intervened between 1995 and 2002.

As for the impact of product market competitiveness, an important indicator is related to the dominant form of economic and financial control of the firms operating in different sectors. The ESES data set allows to know whether the firm is fully state owned, mainly state owned or privately owned. In addition, for several countries, it contains information about the features of the market in which each firm operates (local or regional market, national market, European market or world market), which is particularly important to evaluate the degree of competitiveness of the market.

Another important source of information on the degree of market power in various product markets is the OECD International Regulation Database. Both economy-wide regulatory indicators and industry-specific indicators could be matched to the ESES in order to produce a more complete description of the degree of competitiveness in the different industries. The OECD data base indicators refer for example to product market regulations that provide firms with market power, and introduce barriers to entry of new firms.

With respect to labour market regulation, it is important in the first place to analyse the role of union bargaining power in the determination of wages and, second, to investigate how it interacts with the degree of market power of existing firms. As automatic extension mechanisms of collective bargaining are present in many European countries, both union density and collective bargaining coverage are not useful indicators of union monopoly power. To evaluate the role played by unions it is instead more useful to look at different features of the system of collective bargaining, for instance to whether wages are determined through single-employer bargaining or through multi-employer bargaining and to investigate whether industry wage differentials are affected by these different systems of bargaining. This could be done using the information on the level of collective wage bargaining that is available in the ESES data base. Finally, also in the case of labour market regulations the ESES data set could be merged with cross-country indicators of regulation and rigidity in the labour market taken from the OECD data bases, in order to study their impact on industry wage differentials and to gain additional information relative to their links with product market regulations. (We also would like to link the ESES with the ESBS).

PI: Francois Rycx

Ilan Tojerow, Robert Plasman, Michael Rusinek, Thierry Lallemand, Sali Sissoko, Gungor Karakaya, Leila Maron, Daphné Valsamis, Sile O'Dorchai, Sabrina Veinders, Danièle Meulders, Jérôme De Henau.