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Price and Wage Setting in an Integrating Europe

Price and Wage Setting in an Integrating Europe. NBB Colloquium, 13-10-2006 F. Abraham, J. Konings, S. Vanormelingen LICOS and Faculty Economics and Management KULeuven. Motivation. Accelerated process of economic integration Euro Enlargement China in WTO China and India new world powers

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Price and Wage Setting in an Integrating Europe

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  1. Price and Wage Setting in an Integrating Europe NBB Colloquium, 13-10-2006 F. Abraham, J. Konings, S. Vanormelingen LICOS and Faculty Economics and Management KULeuven

  2. Motivation • Accelerated process of economic integration • Euro • Enlargement • China in WTO • China and India new world powers • Internationalization of production: outsourcing, FDI, offshoring • Changing trade pattern towards low wage regions may have substantial effects on Western product and labor markets that are heavily unionized Price and Wage Setting in an Integrating Europe

  3. Trend trade and production Price and Wage Setting in an Integrating Europe

  4. Import Penetration according to Region Price and Wage Setting in an Integrating Europe

  5. Outsourcing Price and Wage Setting in an Integrating Europe

  6. Motivation continued • International trade matters for labor markets: • Rodrik: Union bargaining power weakens as substitutability of workers increases • Outside options change • Spillovers between product and labor markets (Konings and Walsh, 1994; Abraham and Konings, 1999) • Impact depends on structural rigidities and in particular on how price and wage setting mechanism works (Blanchard and Giavazzi, 2003) Price and Wage Setting in an Integrating Europe

  7. Contributions • Estimate impact of globalization on both price-cost margins and union bargaining power • Globalization is broadly defined: import penetration according to region of origin • Outsourcing • Foreign ownership (international rent sharing) Price and Wage Setting in an Integrating Europe

  8. Structure • Background Model (Blanchard) • Data • Estimation • Results • Conclusion Price and Wage Setting in an Integrating Europe

  9. A Simple Framework of product and labor market interactions • Wage Setting: W=PF(u,Z) • Price Setting: P=(1+μ)W • How does economic integration in the product market spill over to the labor market?  more product varieties (Krugman)  market shares of domestic firms fall Then μ falls • Labor Market to Product Market?  Outside options: bargaining power falls, wage curve shifts in. Price and Wage Setting in an Integrating Europe

  10. B A Price setting Interaction between labor market and product market Price and Wage Setting in an Integrating Europe

  11. Estimation • Hall Approach: • Production Function: • Union Bargaining: Price and Wage Setting in an Integrating Europe

  12. Equation that will be estimated Price and Wage Setting in an Integrating Europe

  13. Mark-up and bargaining power for manufacturing as a whole Robust standard errors in parentheses * significant at 5%; ** significant at 1% Price and Wage Setting in an Integrating Europe

  14. Mark-up per NACE 2 digit sector Price and Wage Setting in an Integrating Europe

  15. Union bargaining power per NACE 2 digit sector Price and Wage Setting in an Integrating Europe

  16. Determinants bargaining power and mark-up Robust standard errors in parentheses * significant at 5%; ** significant at 1%

  17. Imports according to region of origin

  18. What about outsourcing? • Outsourcing should increase rents, because of gains in efficiency (learning effects, variety effects) (Amiti and Konings, 2005)  also bargaining power should go up. • Kramarz (2003): Hold up since outsourcing fixes quantities and prices for a period of between 6 months to a year. • On the other hand, the option of outsourcing increases the threat point of the firm, which could lower bargaining power (substitution possibilities go up). • Measure: Share of imported intermediate inputs in total intermediate inputs used (I/O tables 1995 and 2000). Price and Wage Setting in an Integrating Europe

  19. Effects of outsourcing Price and Wage Setting in an Integrating Europe

  20. Conclusion • Union power and mark-ups are positively related • Import penetration reduces mark-ups and bargaining power • This effect is strongest for imports that come from the low wage countries • Outsourcing tends to have a positive effect on mark-ups and bargaining power Price and Wage Setting in an Integrating Europe

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