Labour demand in Uruguay before and after re-unionisation

This paper examines a unique situation in Uruguay where before-after comparisons about the impact of collective bargaining can be made. During the period under study there were three distinct regimes: (1) 1975-1984 when bargaining was banned, (2) 1985-1991 when there was tripartite bargaining, and (3) 1992- 1997 when there was bargaining without government involvement. During the third regime the economy became much more open, which would presumably also have an effect on bargaining results. Strong evidence of a change in economic behaviour after 1985 is reported. Based on this evidence, a standard labour demand model, derived from a neoclassical framework, for 1975-1984 and a right-to-manage bargaining model for 1985-1997 are estimated. The results show that the long run wage elasticity of labour demand and the employment-output elasticity fell sharply, while there was no overall change in the amount of time needed for employment to adjust to its equilibrium level. The bargaining model results indicate that unions significantly raised wages in 1985-1992. Afterwards, the change in the bargaining structure and the increased openness had a pronounced effect on bargaining outcomes. The overall impact of unions has been a much higher level of wages at the cost of a lower level of employment.