Centralised vs. Decentralised Wage-Setting Systems and Capital Accumulation — Evidence from OECD Countries,1960–1990

There has recently been intense debate about the relative merits of a centralised wage-setting system vis-a-vis a decentralised system. Most of the theoretical and empirical works on this issue focus on the static or current macroeconomic performance in terms of employment and inflation and microeconomic efficiency resulting from enhanced labour market flexibility. Following Lancaster's work and subsequent extensions by Schott and Vartiainen, this paper regards wage bargaining as a dynamic game involving conflict over the distribution of current and future income. It is argued that the intertemporal decision makings of both workers and employers are influenced by so-called prisoners' dilemma. In such situations, it is claimed that centralised or corporatist wage negotiations system leads to higher investment rates. This claim is corroborated with evidence from selected OECD countries.