Wage interactions: comparisons or fall-back options?

This paper examines the degree to which the importance of wages elsewhere in wage determination stems from comparisons made by workers, as opposed to re°ecting unions' fall-back options in the bargaining process. The di±culty of distinguishing these hypotheses is shown in the context of a bargaining model. It is argued that the use of the wage of a `pay leader' solves the fundamental problem of identifying `comparison wages' that might not also constitute part of workers' expected income if negotiations were to break down. The empirical work uses a unique panel of data covering 321 unionised bargaining units in the UK chemicals industry between 1978 and 1989. Results support anecdotal reports of pay leadership and suggest that wages elsewhere matter because comparisons are important to workers. In this sense, the results support the notion that `fairness considerations' drive wage interactions. ¤I would like to thank William Brown, Chris Doyle, Andrew Hildreth, Steve Machin, Andrew Oswald, Bahram Pesaran, two referees and the Editor of this Volume for helpful comments. All remaining errors are my own. This paper is based on work begun while at the University of Cambridge and was funded by ESRC Postgraduate Research Training Award number F00428725059. The views expressed in this paper are those of the author and not necessarily those of the Bank of England.