Wages and hours determination: competition or bargaining?

Abstract

We develop the predictions of the competitive or "compensating differentials" model and the firms-unions bargaining model of simultaneous wages and working hours determination, and we propose an econometric test to decide which model best explains the observed data. Under cometition, we expect hours to be endogenous and negatively related to wages. We apply this test in the framework of a wage equation that controls for other determinants of wages and hours, with a balanced panel of five years consisting of more than 900 Spanish manufacturing firms observed during the years 1990-1994. The evidence underlines the consistency of the bargaining model with the observed wages-hours locus.