Bank of Lithuania
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No 121

Striking a Bargain: Narrative Identification of Wage Bargaining Shocks

  • Abstract

    We quantify wage bargaining shocks’ effects on macroeconomic aggregates in Germany using a structural vector auto-regression model. We identify exogenous variation in bargaining power from episodes of minimum wage introduction and industrial disputes. This disciplines the impulse responses of unemployment and output, and sharpens inference on the behaviour of other variables, which is consistent with theoretical predictions from search and matching models. We find that wage bargaining shocks are an important contributor to agregate fluctuations in unemployment and inflation, exhibit close to full passthrough to consumer prices, and imply plausible dynamics for the vacancy rate, firms’ profits, and the labor share.

    Keywords: Wage bargaining, minimum wage, industrial action, narrative restrictions, structural vector autoregression.

    JEL classification: J2, J3, E32, C32.