Wage drift and the relevance of Centralized wage setting:" Evidence from the Netherlands"

In the Netherlands wage determination takes place in two stages. First trade unions negotiate a contractual wage. In the second stage employees and employers may negotiate a higher wage. The employee may be extremely talented or the employer may want to attract more qualified personnel. Therefore the final wage may be higher than the contractual wage. The additional increase in the wage of a worker is known as the wage drift. In this thesis I provide evidence for a (strong) negative relationship between the wage drift and the contractual wage. This indicates that if the contractual wage goes up the wage drift will go down and vice versa. This has important implications for centralized wage setting. Trade unions may negotiate a relatively low contractual wage to induce firms to open more vacancies. This creates more opportunities for unemployed workers. However if the wage drift goes up when the contractual wage goes down firms will not be induced to open additional vacancies. If trade unions want a high wage the wage drift also diminishes the possibilities to get one, since the higher contractual wage leads to a lower wage drift. Therefore the effectiveness of centralized wage negotiations is diminished by the wage drift.