Efficiency Wages, Unemployment Benefits and Union-Firm Wage Bargaining

In the economic literature, efficiency wages and union-firm wage bargaining are often treated as two distinct wage formation mechanisms. This paper demonstrates that these two wage factors are not, as a rule, mutually offsetting, but instead mutually reinforcing in setting the wage rate above the market-clearing wage. This point is illustrated by a theoretical model where efficiency wages reduce the adverse effect of rent-sharing because of the higher labour productivity that is associated with higher wages and, therefore, the reduced impact on profits. We test this model on data for economies with different characteristics concerning their bargaining systems. In each case we found consistent evidence of a dominant and prevailing effect of the non-competitive wage formation mechanisms over the competitive ones.JEL: J31, J51, J65.