Industrial relations, legal regulations, and wage setting

The preceding chapter summarized the main features of low-wage work across our six countries. In this chapter and the next, we explain the main institutional determinants of the size and structure of low-wage work, focusing on the national institutions involved in setting pay. The overall incidence of low pay in the six countries and the results of the case studies suggest that pay-setting institutions play a central role in explaining international differences in low-wage work. By "pay-setting institutions" we mean the formal and sometimes informal mechanisms used to determine the wages (and benefits) received by workers in different industries and occupations within each country. More specifically, we mean collective bargaining arrangements, minimum wages, and other labor and product market legislation, regulations, and procedures that have an impact on wage determination. These institutions, with their mutual linkages, may form "inclusive" or "exclusive" pay-setting systems. In exclusive systems, the pay and other terms and conditions of employees with strong bargaining power have little or no effect on employees with weaker bargaining power within a company, within an industry, or across industries. Inclusive systems extend the benefits of such bargaining power to workers who have relatively little bargaining power in their own right. The more inclusive the set of institutions, the better protected are those at the low end of the workforce. Inclusiveness does not depend just on the formal institutions but also on the extent to which the various players are committed to reducing inequality. Our review of national pay-setting institutions has two main findings. First, the prevalence of low-wage work appears to be strongly related to the inclusiveness of national pay-setting institutions. The more inclusive the pay-setting institutions, the lower the prevalence of low-wage work. The most inclusive systems use centralized and coordinated national collective bargaining agreements to extend the wage gains of the most powerful, generally unionized, workers to those workers with less bargaining power, especially less-skilled and non-union workers. Some countries, meanwhile, provide a degree of inclusiveness through a national minimum wage that positions a wage floor below workers who would otherwise have little ability to secure higher wages. The least inclusive countries, such as the United States, rely on largely unregulated market forces to set wages, and in contrast to many European governments, in the past the U.S. government has not been committed to increasing the statutory minimum wage. The second key finding is the important role played by employer "exit options"-the de jure or de facto exemptions, exceptions, or loopholes in otherwise inclusive pay-setting institutions. For example, where nonstandard work contracts or workers in small and medium-sized companies fall outside national collective bargaining agreements, employers are able to set low wages, even in countries with extensive collective bargaining. Lax enforcement of existing labor law, particularly in contexts where there is little or no union oversight, provides another exit option for firms seeking to cut labor costs. The most vulnerable workers in the five industries we studied were most affected by these exit options. Gender, ethnicity, national origin, region of residence, and other factors all play a role in explaining differences in the wages paid across industries and occupations, but we concentrate here on institutional features that have an impact on workers' bargaining power and therefore help to determine what they earn-and also, potentially, other dimensions of their job quality. The most important of these institutions in most of our countries is the national system of collective bargaining. The national minimum wage is probably the next most important national pay-setting institution, particularly in countries where collective bargaining is limited in its reach. Employment protection legislation (EPL) and, more widely, the regulations concerning the rights attached to different employment statuses (permanent and temporary) also influence workers' bargaining power, as do product market regulations. Efforts to open product markets to national and international competition often increase competitive pressures on workers, especially by putting them in direct competition with workers from other countries or with companies not covered by collective agreements within the same country. Finally, two dimen sions of wage setting at the level of the firm or organization have to be taken into account. The first relates to nonwage benefits, many of which are fixed in some countries by law or by collective agreement (and therefore are not dependent on employers' discretion). Such benefits constitute a kind of minimum "social wage" (see also chapter 2). The second dimension relates to institutions promoting employees' representation and voice at the organizational level. The rest of this chapter looks at the inclusiveness of collective bargaining arrangements and national minimum wages; at nonstandard work arrangements and product market deregulation as opportunities for exit options from the generally more inclusive national paysetting systems; and finally, at issues related to pay setting at the firm level through "social wages" and employee voice. Copyright © 2010 by Russell Sage Foundation