Browsing by Subject "wage bargaining"

A model is been built where two countries compete for a multinational enterprise’s (MNE’s) foreign direct investment (FDI) provided that its arrival will increase the host country’s social welfare. Both potential host countries have unionised labour markets where monopoly labour unions determine the level of the wage setting to be either decentralised, intermediate level, or centralised. The governments may influence the unions’ decision by setting a lump-sum tax on them. Both countries have two sectors, a non-sheltered and sheltered sector. The MNE will enter in the non-sheltered sector and is assumed to be more productive than the incumbent firms there. Product market competition between the MNE and domestic incumbent firms is ruled out to isolate the effect of product market competition from the effect of pure wage compression. The game evolves in five stages: (1) the governments set taxes, (2) the monopoly unions choose the level of the wage setting, (3) the MNE chooses its investment location, (4) the monopoly unions set wages, and (5) the firms set output. The purpose of the model is to learn whether the degree of centralisation of wage setting can be used as a strategic choice to attract foreign direct investment. The main results of the paper are the following. It was found that the MNE’s (incumbent unions’) most preferred choice is always centralised (decentralised) wage setting. It was shown that the governments’ most preferred choice is either decentralised or centralised wage setting – depending on the relative sizes of the two sectors. If the social welfare in country 1 is the highest under decentralised wage setting, then the optimal policy of government 1 is to set zero income taxes. If the social welfare in country 2 is the highest under centralised wage setting, then the optimal policy of government 2 is to set positive taxes slightly over that required to make the domestic incumbent labour unions prefer centralised wage setting. Given this, the MNE will always invest in country 2. The exact expressions for the stage-contingent lump-sum taxes were derived. To my best knowledge, this is a novel contribution that cannot be found elsewhere.