Efficiency of Collective Bargaining in the Public Sector: a Natural Experiment

In this paper I develop a two-stage bargaining model determining wages and employment and apply it to the public sector. Solving the model leads to structural wage and employment equations that I estimate using data from the public sector in Iceland. Nested in the model are the major collective bargaining models (right-to-manage and efficient contracting). The model can be empirically tested to distinguish between the bargaining models. Significant changes were made to collective bargaining contracts in the public sector in Iceland at the same time the bargaining process was decentralized, which provides for a natural experiment. The model is estimated for the period before the changes were made and again after the changes had taken root. The result is that the bargaining power of unions has changed between the two periods and the bargaining structure has become more inefficient with the changes in the collective bargaining contracts.