Tests of alternative wage employment bargaining models, with an application to the UK aggregate labour market

In this paper we propose a test that discriminates among alternative models of bargaining for wages and employment. The test rests on a theoretical framework which encompasses both the labour demand and the efficient bargain models of wage and employment determination. It is based on testing the cross equation restrictions implied for the coefftcients of union power variables in reduced form wage and employment equations. The test is illustrated for the Layard and Nickell model of the aggregate UK labour market, for which it is found that one can reject both the labour demand model and the hypothesis that wage employment bargains are efficient, in favour of a generalised model of inefficient bargaining for wages and employment.

European Economic Review (with Alan Manning)

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