Date Added: Jul 2011
Pattern bargaining with the tradables (manufacturing) sector as wage leader is a common form of wage bargaining in Europe. The authors question the conventional wisdom that such bargaining produces wage restraint. In the model all forms of pattern bargaining give the same outcomes as uncoordinated bargaining under inflation targeting. Under monetary union wage leadership for the non-tradables sector is conducive to wage restraint, whereas wage leadership for the tradables sector is not. Comparison thinking may lead the follower to set the same wage as the leader. Such equilibria can arise when the leader sector is the smaller sector and promote high employment.