[Journal:] Zeitschrift für ArbeitsmarktForschung – Journal for Labour Market Research [ISSN:] 2510-5027 [Volume:] 38 [Year:] 2005 [Issue:] 2/3 [Pages:] 165-179
The paper explores wage setting practice in eastern Germany since unification. It gathers evidence to support the claim that economically non-viable collective agreements have fostered decentralized wage setting. First, we document the declining organization rates of both employers and employees, allowing a drift between collectively-agreed and actual wages. Second, we examine macroeconomic wage flexibility by estimating a switching regime model, in which the observed distribution of individual wage changes is generated by simultaneous processes of union, nominal or no wage rigidity. The results indicate that wages become more flexible during transition. Furthermore nominal wage rigidity, typical of decentralized bargaining, is much more common in eastern than in western Germany, while the opposite holds regarding union wage rigidity.