Labour markets with company wage policies

Abstract

In the conventional perfectly competitive model of the labour market, wage-setting is individualistic in the sense that identical workers should receive identical wages in different firms and different workers should receive different wages in the same firm. But, in reality, wages often seem to be attached more to the job than the worker, with identical workers receiving different wages in different firms and different workers receiving the same wage in a single firm. There is what we call a Company Wage Policy. In this paper we explore the consequences of assuming that the labour market is characterised by company wage policies. We consider a number of issues; the nature of wage dispersion and unemployment, the effects of benefits, minimum wages and unions, and the incentives to acquire skills. We show that, in general, company wage policies imply labour market behaviour that is very different from the perfectly competitive model, and seems more in line with empirical evidence. Finally, we consider why company wage policies might exist