Does the wage structure depend on the wage contract? A study of public sector wage contracts in Iceland

Abstract

It is widely accepted within the field of labor economics that centralization ofcollective bargaining leads to lower wage dispersion. But is it possible to change thewage structure through changes in the collective bargaining agreement anddecentralization of the bargaining process? A unique opportunity to explore thisquestion presented itself when changes were made to collective bargaining contracts inthe public sector in Iceland.In the first chapter I look at the Icelandic labor market. The Icelandic labor force isoften described as being flexible. But is it really? Using definitions of labor-marketflexibility, I explore whether the Icelandic labor market can be classified as such andfind that on most measures of flexibility the Icelandic labor market can be described asflexible.In the second chapter I explore the effects of the changes in the bargaining structureand decentralization in the public sector in Iceland on the wage structure. Did wagedispersion increase with decentralization, as theory would predict? I find that wagelevels rose significantly, and that the wage structure for total wages did not change butthat the dispersion of daytime wages increased.In the third and final chapter I develop a model of collective bargaining as a two-stageprocess in the manner of Manning (1987). The resulting two-equation nonlinearstructural model is then applied to the central government in Iceland in order todetermine whether the collective bargaining structure changed along with the changesin the collective bargaining agreements.The decentralization of bargaining and the change in the collective bargainingagreements has changed the bargaining structure in the public sector in Iceland. I findthat the unions have a greater bargaining power over employment than over wages,whereas their bargaining power over wages currently seems to be much greater fordaytime wages than for total wages. Based on the means of the estimates of thebargaining power of unions over wages and employment, respectively, I can reject themonopoly union and right-to-manage bargaining models.