UNIONS, WAGES AND EMPLOYMENT - EVIDENCE FROM FINLAND

Reduced-form wage and employment equations derived from a bargaining model are estimated using the two-step method proposed by Engle and Granger (1987 Econometrica, 55, 251-276). Wages and employment are influenced by variables which determine profits on the one hand, and the utility of the union on the other hand. In addition, bargaining power appears to matter. Union strength was discovered to have a positive effect on both wages and employment in the manufacturing industry. The two-step method made it possible to evaluate both the long-run elasticities and short-run adjustment. Step response functions indicate that adjustment is not particularly slow in general. This appears to be true for wages but especially for employment. Hence, if the actual real-wage employment combination is considered inappropriate, it is not primarily due to 'too slow' adjustment. Rather, it implies that the equilibrium is inappropriate.