The Effect of Globalization on Union Bargaining and Price-Cost Margins of Firms

LICOS Centre for Institutions and Economic Performance Discussion Paper No. 181/2007

35 Pages Posted: 15 Mar 2008

See all articles by Filip Abraham

Filip Abraham

KU Leuven - Department of Economics

Jozef Konings

Catholic University of Leuven (KUL) - LICOS - Centrum voor Transitie-economie; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Stijn Vanormelingen

Hogeschool-Universiteit Brussel (HUBrussel); KU Leuven - Centre for Institutions and Economic Performance (LICOS)

Date Written: January 2007

Abstract

In recent years, Europe has witnessed an accelerated process of economic integration. Trade barriers were removed, the euro was introduced and ten new member states have joined the European Union. This paper analyzes how this process of increased economic integration has affected labor and product markets. To this end, we use a panel of Belgian manufacturing firms to estimate price-cost margins and union bargaining power and show how various measures of globalization affect them. Our findings can be summarized as follows: On average, firms set prices about 30% above marginal costs, but there is substantial variation across sectors, with the lowest mark-up around 19% and the highest around 52%. In addition, we find evidence that unions bargain over both wages and employment. We estimate an index of bargaining power, which reflects the fraction of profits that is passed on to workers into higher wages. Depending on the sector, this fraction varies between 6% and 18% and it increases with the markups of firms. Finally, we find that globalization puts pressure on both markups and union bargaining power, especially when there is increased competition from the low wage countries. This suggests that increased globalization is associated with a moderation of wage claims in unionized countries, which should be associated with positive effects on employment.

Keywords: Mark-ups, Trade Unions, International Trade

JEL Classification: F16, J50, L13

Suggested Citation

Abraham, Filip and Konings, Jozef and Vanormelingen, Stijn, The Effect of Globalization on Union Bargaining and Price-Cost Margins of Firms (January 2007). LICOS Centre for Institutions and Economic Performance Discussion Paper No. 181/2007, Available at SSRN: https://ssrn.com/abstract=1105727 or http://dx.doi.org/10.2139/ssrn.1105727

Filip Abraham

KU Leuven - Department of Economics ( email )

Leuven, B-3000
Belgium

Jozef Konings (Contact Author)

Catholic University of Leuven (KUL) - LICOS - Centrum voor Transitie-economie ( email )

Waaistraat 6 - box 3511
Leuven, 3000
Belgium
+32 16 326 589 (Phone)
+32 16 326 599 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Stijn Vanormelingen

Hogeschool-Universiteit Brussel (HUBrussel) ( email )

Stormstraat 2
Brussels, 1000
Belgium

KU Leuven - Centre for Institutions and Economic Performance (LICOS) ( email )

Waaistraat 6 - box 3511
Leuven, 3000
Belgium

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