Companies benefit from a flexible wage system

A group of researchers have analyzed the effects that decentralized wage negotiations have on companies in the private sector.

There’s been a growing trend of employees being subject to decentralized wage bargaining over recent years and a new article published in the Journal of Labor Economics has concluded that wages have increased among all employees and that companies are able to keep personnel.

Jakob Roland Munch, professor of economics at the University of Copenhagen, said:

“Average wages rise when employees and managers negotiate on an individual basis, without a collective-bargaining agreement dictating fixed rates for all.”

This is the first time that the trend has been tracked for over a decade. The study reveals that the average wage increase among Danes who have been subject to decentralized wage bargaining is 5 percent higher compared to employees whose wages depend on a centralized decision.

Professor Munch added:

“The examples we have unearthed in the private sector show clearly that the average wage rises under decentralised bargaining. We didn’t expect such a large difference. Even those at the bottom of the hierarchy win under a flexible system. Many other countries in Europe organise wage negotiations in a similar manner, so they may be interested in and inspired by our results.”

People with long-term work experience and a higher level of education were more likely to benefit than those without as much work experience and worse education (a 7 percent rise versus only a 3 percent rise respectively).

Employees are afforded better opportunities (focusing on their abilities) under a flexible wage system and allows companies to easily adapt to changes in demand.

Munch continued:

“Globalisation and technological progress affect companies differently and create a need for restructuring. For example, flexible wage systems make it easier for companies facing growing demand to retain key employees, while employees under threat of outsourcing can end up keeping their jobs at a lower wage. One fairly obvious interpretation of the positive effect revealed by our study is that a decentralised system means companies are better placed to cope with changes to market conditions and are therefore more productive.

He stressed that the “research concerns the private sector, but the principles are transferrable to other sectors,”

He concluded:

“Our research sends a signal that decentralisation actually makes it possible to identify areas in which more flexible wage bargaining makes units function more efficiently. It is easy to envisage the same effects in parts of the public sector, where wage bargaining is currently relatively centralised.”

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