Wage Determination: Insiders and Other Issues

Introduction

The persistence of high wage increases in Britain over the last five years despite record levels af unemployment has been the subject af much recent speculation. One particular hypothesis which has found some favour-among both professional economists and policy makers has been the view that wage setting is dominated by “insiders” (see, for example, Blanchard and Summers, 1986, Blanchflower and Oswald, 1987 and Solow, 1985).  The general idea here is the following. Suppose there is an autonomous gain in labour productivity. If the labour market is competitive, the firm will expand output and employment at the given wage. However, under insider wage setting there will be tendency for the productivi ty gain ta be captured in the form af higher wages. Under these circumstances the incentive for the firm ta expand output and employment is much reduced. Similar remarks apply ta an increase in the demand for the firm’s product. Under insider wage setting the tendency will be for wages and hence output prices ta be pushed up, translating the demand increase into a wage gain as opposed to an employment gain.

• ISSN: 0357-9603
• ISBN: 951-9281-87-8