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CEP discussion paper

Wage Bargaining and Incomes Policy: Possible lessons for Eastern Europe

In Eastern Europe (as in Western) wages will be mainly set by collective bargaining. The bargains are likely to be at a level of the firm. Cross-country evidence suggests that where there is a high coverage of collective bargaining and bargaining is at a firm level, quite high unemployment is needed to restrain inflation. Rigid norms for wage growth cannot last indefinitely, though they can help for a shortish time during disinflation. Tax-based incomes policy, however, can offer a permanent source of downward pressure on nominal wages, while permitting flexibility to preserve efficiency. There should be a uniform norm (unrelated to the circumstances of the enterprise). The norm should relate to average hourly earnings (or earnings per worker), and not to the total wage bill (WN). The latter would discourage structural adjustment.

Richard Layard and Diane J. Reyniers

May 1990     Paper Number CEPDP0002