When and Why Was There Wage Restraint? Belgium, Germany and the Netherlands, 1950–2010

This paper questions the influential interpretation that strong unions and centralized wage bargaining facilitate wage restraint and that during the postwar period wage restraint was an important cause of strong economic growth performance. According to this view, wage bargaining centralization facilitates cooperation between workers and capital on wage restraint which leads to more investments and jobs, beneficial to both classes. This view is contrasted with a power-oriented perspective that sees wage restraint as inequality-causing and sees strong trade unions as conducive to redistribution from capital to labour, rather than wage restraint. The paper uses data on wage bargaining institutions, wages and productivity from 1950 to 2010 for Belgium, Germany and the Netherlands to test the opposite hypotheses of the two views. The results show that there has been more wage restraint after 1980 than before, and not more with more bargaining centralization. The results have consequences for three debates. One, the  mainstream wage restraint literature, which has made large theoretical claims (that wage restraint is a win-win solution needing bargaining coordination to be realized) on basis of very little empirics, has recently been contradicted by not only this paper on three continental European economies but also a study of Britain and one of Scandinavia. The mainstream view of wage restraint and its implicit coordination-centred view of (wage bargaining) institutions thus should be questioned, in line with a recent literature stressing the power aspects of institutions (what Streeck calls Durkheimian aspects) rather than the coordination aspects. Second, wage restraint has long been assumed to be conducive to investments and job creation, but in line with recent criticism by Piketty, this paper shows another empirical picture. The paper thus suggests that the link between wage restraint and investments should be reconsidered, with an eye to the Keynesian effect of wages on demand and economic activity. Third, the paper stresses that wage restraint increases the incomes of capital owners relative to workers, and thus has a positive effect on inequality. The wage restraint–inequality link thus should not be neglected.