Monday, February 3, 2014

[J.B.] Say, yes. Kshama, no.

Labor Supply and Demand come into equilibrium thanks to flexible wages. If the law makes them sticky, you won't be prosperous like Germany say, Christian Dustmann, Bernd Fitzenberger, Uta Schönbergand Alexandra Spitz-Oener;
Our research has important consequences for what Europe’s ailing southern European countries can learn from the German experience. Other countries, such as Italy and France, have far more centralised and legally anchored labour-market institutions than Germany....
....since 1995, Germany’s competitive position has persistently improved, while the competitiveness of some of its main European trading partners has deteriorated (Spain and Italy) or remained close to the 1995 position (France).
We argue that in the early to mid-1990s, the specific governance structure of the German system of industrial relations allowed for an unprecedented increase in the decentralisation (or localisation) of the process that sets wages, hours, and other aspects of working conditions, from the industry- and region-wide level to the level of the single firm or even the single worker. This process of wage decentralisation helped to bring down wages, in particular at the lower end of the wage distribution, and ultimately improved the competiveness of the German economy.
Germany’s system of industrial relations is not rooted in legislation and is not governed by the political process, but instead is laid out in contracts and mutual agreements between the three main labour-market parties: trade unions, employer associations, and works councils (the worker representatives who are typically present in medium-sized and large firms).
This allowed for an unprecedented decentralisation of the wage setting process....
Textbook economics. Ignore it at your own risk.

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