An Open Economy with Industry-Level Bargaining

Chapter 3 and 4 have shown that the response of wages to exogenous changes in the environment is crucial for the economy’s reaction. One of the most striking differences of the labour markets in various countries are the wage setting procedures. The preceding chapters presumed that wages are determined by negotiations between workers and firms. This assumption may be plausible for the United States. In most European countries, this assumption may be justified for the upper income classes. However, the influence of collective bargaining in most European countries is remarkable for middle and lower income classes.1 Consequently, the model presented in chapter 3 can only serve as a reference point for these countries.