Industrial relations, legal regulations, and wage setting

The preceding chapter summarized the main features of low-wage work across our six countries. In this chapter and the next, we attempt to explain the main institutional determinants of the size and nature of low-wage work in each country. In this chapter, we focus on national institutions involved in setting workers' pay. In the next chapter, we complement our analysis of pay-setting with a review of national institutions that affect labor supply, including unemployment benefits and other income support programs, education and training policy, and immigration. The results of the case studies suggest that "pay-setting institutions" play a central role in explaining international differences in low-wage work. By pay-setting institutions, we refer to the formal and sometimes informal mechanisms used to determine the wages (and benefits) received by workers in different industries and occupations within each country. More specifically, we mean collective-bargaining arrangements, minimum wages, and other labor and product market legislation, regulations, and procedures that have an impact on wage determination. Our review of national pay-setting institutions has two main findings. First, the prevalence of low-wage work appears to be strongly related to the "inclusiveness" of national pay-setting institutions. The more "inclusive" the pay-setting institutions, the lower the prevalence of low-wage work. The most inclusive systems use centralized and coordinated national collective bargaining agreements to extend the wage gains of the most powerful, generally unionized, workers to those workers with less bargaining power, especially less-skilled and fnon-union workers. Some countries, meanwhile, provide a degree of inclusiveness through a national minimum wage that extends a wage floor below workers who would otherwise have little ability to secure higher wages. The least inclusive countries, such as the United States, rely on largely unregulated market forces to set wages. The second key finding of our pay-setting analysis is the important role played by employer "exit options" --de jure or de facto exemptions, exceptions, or loopholes in otherwise inclusive pay-setting institutions. Non-standard work contracts, for example, may fall outside of national collective bargaining agreements, allowing employers to set low wages even in countries with extensive collective bargaining. Lax enforcement of existing labor law, particularly in contexts where there is little or no union oversight, can provide another exit option for firms seeking to cut labor costs. Gender, ethnicity, national origin, region of residence, and other factors all play a role in explaining differences in wages paid across industry and occupation, but we concentrate here on institutional structures that are explicitly designed to determine what workers earn. The most important of these institutions in most of our countries is the national system of collective bargaining. The national minimum wage is probably the next most important national pay-setting institution, and is particularly important in countries where collective bargaining is limited in its reach. We also stress that a largely unregulated competitive labor market is a key pay-setting institution, with important implications for the prevalence of low-wage work, particularly in the absence of strong collective bargaining or a binding national minimum wage. Two less obvious pay-setting institutions are non-standard work arrangements (such as part-time and temporary work) and product-market regulations. The many complex and evolving forms of non-standard work arrangements grant different rights and responsibilities to firms and workers, frequently shifting the relative bargaining power of employers and employees with direct effects on low-wage work. Efforts to open product markets to national and international competition often increase competitive pressures on national workers, especially by putting national workers in direct competition with workers from other countries. The rest of this chapter looks, in turn, at the "inclusiveness" of collective bargaining arrangements and national minimum wages; non-standard work arrangements and product-market deregulation as opportunities for "exit options" from the generally more inclusive national pay-setting systems; and, finally, at issues related to pay-setting at the firm level.