Wage Bargaining with Endogenous Profits, Overtime Working and Heterogeneous Labor

Abstract

This paper estimates the role of insider power in wage determination in a unionized industry, examining the direction and magnitude of biases which may arise through failure to control for variation in both hours of work and the composition of the labor force and through failure to control for the endogeneity of measured profits. Furthermore, by examining the extent to which rent-sharing is related to exogenous demand shocks rather than to potentially endogenous productivity, we provide a test of the bargaining and ‘pure’ efficiency wage models, finding that the majority of the insider weighting can be explained by the bargaining model. Our data set covers earnings and profitability in the New South Wales coal industry from 1952 to 1987. We estimate a partial adjustment model and test for co-integration of the time series in order to establish whether or not a long-run stable equilibrium exists.