Wage-Setting Institutions and Wage

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This entry is adapted from the peer-reviewed paper 10.3390/encyclopedia5040191

This entry examines how wage-setting institutions (WSIs) shape wages across advanced economies. It focuses on four core mechanisms—minimum wages, collective bargaining, wage coordination, and wage centralization—drawing on theoretical insights, empirical evidence, and cross-country comparisons. The analysis shows that minimum wages safeguard low-paid workers but have heterogeneous employment effects depending on their level and enforcement. Collective bargaining raises average wages and compresses wage inequality, though it can reduce flexibility and create insider–outsider dynamics. Wage coordination stabilizes wage growth, prevents inflationary spirals, and fosters equity, while wage centralization promotes solidarity wages and macroeconomic discipline but may limit adaptability. Using The Organization for Economic Co-operation and Development (OECD) and Institutional Characteristics of Trade Unions, Wage Setting, State Intervention and Social Pacts (ICTWSS) data, the study highlights institutional diversity, ranging from coordinated Nordic models to fragmented liberal systems, and identifies trends toward “organized decentralization”. Policy implications suggest that WSIs should be viewed not as rigidities but as adaptable frameworks that can balance efficiency, equity, and stability when carefully designed. The conclusion emphasizes that the future of wage-setting lies in leveraging institutional complementarities to respond to globalization, technological change, and shifting labor market conditions.

wage-setting institutions wage minimum wages collective bargaining wage coordination wage centralization

Wages are not simply determined by the forces of supply and demand; they are strongly mediated by institutional arrangements that govern how labor markets function. These wage-setting institutions play a central role in shaping wage levels, wage inequality, employment, and broader macroeconomic outcomes ^[1]^[2]. Historically, wage-setting institutions evolved in response to the limitations of unregulated labor markets. In the post-war decades, coordinated bargaining systems in Europe sought to balance full employment with wage stability, while liberal economies emphasized firm-level flexibility. Since the 1980s, globalization and declining union density have challenged traditional corporatist arrangements, leading to institutional reforms and hybrid models such as ‘organized decentralization’. This historical trajectory highlights the adaptive nature of WSIs as mechanisms for reconciling efficiency with social equity.

In the comparative political economy and labor economics literature, four mechanisms are generally highlighted as the main wage-setting institutions: minimum wages, collective bargaining, wage coordination, and wage centralization ^[3]^[4]. Minimum wages are statutory wage floors that prevent wages from falling below a legal threshold. Collective bargaining involves negotiations between unions and employers (or their associations) over wages and conditions. Wage coordination refers to the degree to which different bargaining units align their settlements, while wage centralization describes the firm, sector, or national level, at which binding wage agreements are reached.

These institutions interact in complex ways. For example, strong minimum wages may compress the lower end of the wage distribution, while coordinated or centralized bargaining can contribute to wage moderation and wage compression across industries ^[5]^[6]. From a theoretical perspective, wage-setting institutions influence the distribution of bargaining power, wage rigidity, and the responsiveness of wages to shocks. The well-known “Calmfors–Driffill hypothesis” suggests a hump-shaped relationship between the degree of centralization in wage bargaining and macroeconomic performance ^[3]. Later work emphasizes that outcomes depend heavily on institutional context, globalization, and enforcement capacity ^[7]^[8].

Empirical studies have investigated the effects of these institutions extensively. Neumark and Wascher (2008) provide a comprehensive review of minimum wage effects, finding mixed evidence but some negative impacts on low-skilled employment ^[9]. On collective bargaining, Fanfani et al. (2023) find that wage agreements in Italy increase wages but also influence employment adjustments ^[10]. Cross-national work by the OECD (2017) and Eurofound (2024) highlights how differences in coordination and centralization explain much of the variation in wage inequality across advanced economies ^[11]^[12].

This entry aims to analyze how wage-setting institutions shape wage outcomes, integrating theoretical perspectives, empirical findings, and cross-country comparisons. Section 2 introduces the four wage-setting mechanisms. Section 3 analyses the theoretical expectations of their impact on wages. Section 4 reviews the literature, while Section 5 examines institutional variation across countries. Finally, Section 6 discusses the policy implications, and Section 7 presents the conclusions of the analysis.

References

OECD. OECD Economic Outlook, Volume 1994 Issue 1; OECD Publishing: Paris, France, 1994.
Boeri, T.; van Ours, J. The Economics of Imperfect Labor Markets, 3rd ed.; Princeton University Press: Princeton, NJ, USA, 2021.
Calmfors, L.; Driffill, J. Bargaining structure, corporatism and macroeconomic performance. Econ. Policy 1988, 3, 13–61.
Traxler, F.; Blaschke, S.; Kittel, B. National Labour Relations in Internationalized Markets: A Comparative Study of Institutions, Change, and Performance; Oxford University Press: Oxford, UK, 2001.
Freeman, R. Labor Market Institutions Around the World. In The Handbook of Industrial and Employment Relations; Sage: London, UK, 2007; Chapter 34.
Visser, J. What happened to collective bargaining during the great recession? IZA J. Labor Policy 2016, 5, 9.
Iversen, T. Contested Economic Institutions: The Politics of Macroeconomics and Wage Bargaining in Advanced Democracies; Cambridge University Press: Cambridge, UK, 1999.
Pastore, F.; Shorman, S. Revisiting the Calmfors-Driffill Hypothesis. OFCE Working Paper 2018-33. 2018. Available online: https://www.ofce.sciences-po.fr/pdf/dtravail/OFCEWP201833.pdf (accessed on 27 August 2025).
Neumark, D.; Wascher, W. Minimum Wages; MIT Press: Cambridge, MA, USA, 2008.
Fanfani, F.; Montanari, I.; Naticchioni, P. The wage and employment effects of collective bargaining: Evidence from Italy. J. Public Econ. 2023, 223, 104937.
OECD. OECD Employment Outlook 2017; OECD Publishing: Paris, France, 2017; Available online: https://www.oecd.org/en/publications/oecd-employment-outlook-2017_empl_outlook-2017-en.html (accessed on 27 August 2025).
Eurofound. Minimum Wages Collective Bargaining in the E.U.; Publications Office of the European Union: Luxembourg, 2024; Available online: https://www.eurofound.europa.eu/en/publications/all/minimum-wages-2024-annual-review (accessed on 31 October 2025).

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