How wages develop is the outcome of negotiations between workers and employers about the distribution of output proceeds. DNB’s new Occasional Study [link] describes this process – both in theory and practice – and looks into the question whether the responsible wage policy pursued since the 1980s is still appropriate.
When it comes to wage formation, employers and workers have different perspectives. Employers relate wage developments to labour productivity and output price developments, while workers focus on the development of net wages vis-à-vis inflation. In this bargaining process, there is the risk that special interests win out. After all, it is not self-evident that an employee negotiating his wage increase will consider the impact of this wage increase on employment. Large wage increases may spur firms to make capital-intensive investments and accelerate disposal of the older vintages of capital. Investment in labour-saving technologies in itself could be very desirable. But if this is solely driven by imbalanced labour cost developments in a weak economy, unemployment may rise to high levels for a long time. This was clearly visible in the 1970s. Coordinated wage formation, which is common practice in the Dutch institutional set-up, may reduce the risk of such a socially undesirable outcome.
During the first decades after the Second World War, the labour-income ratio (LIR) experienced substantial shifts because of policy changes (see Chart). During the war, much capital, such as infrastructure, machines and business premises, had been lost. To strengthen the capital base of the economy, the Netherlands opted for a policy of low wage growth in the post-war reconstruction years, so that high national savings could create room for investment. This policy was abandoned in the 1960s, with the LIR rebounding. The 1970s, in contrast, witnessed a strong wage push, which damaged trust between the social partners and resulted in labour shedding. The Wassenaar Agreement of 1982 was an important turning point, because it laid the foundation for co-operative relations between the social partners. The policy of responsible wage development that has been in operation since the mid-1980s has facilitated a massive absorption of labour supply.
Labour-income ratio of the market sector