Slouching Towards Decentralization: An Equilibrium Approach to Collective Bargaining

Abstract Although European institutions and national governments have long pushed for a more decentralized wage bargaining structure, in some countries, it is difficult for company- or establishment-level negotiations to take place. This paper offers an interpretation of this difficulty based on workers’ optimal choices in a strategic framework. I construct an equilibrium matching model that explains under which conditions it is best for workers to negotiate their entire wage at the sectoral level (one-tier bargaining) or to allow for a fraction of their salary be negotiated at the company level (two-tier bargaining). Workers’ strategies do not simply depend on their own characteristics or on those of their firm. They also depend on the decisions of all other employees in the sector. Three alternative Nash equilibria may occur: one-tier bargaining for all workers; two-tier bargaining for all workers; and two-tier bargaining for the most productive workers and one-tier bargaining for all other workers. The prevalence of a specific equilibrium over others hinges on some critical factors, notably the elasticity of the matching function and the properties of the productivity distribution.