Employees and employers are better off when salaries are negotiated individually, rather than as part of a group, new research finds.
A study from the University of Copenhagen revealed that an employee's average salary increases more when workers and managers negotiate on an individual basis, without a collective-bargaining agreement dictating fixed rates for all.
The research found that over a 10-year period, the average increase for employees whose pay was negotiated individually was 5 percent higher than for those whose wages were calculated on the basis of set parameters, such as seniority. The study looked specifically at Danish employees who were working in the private sector.
Jakob Roland Munch, a professor of economics at the University of Copenhagen, said the research shows clear evidence that average salaries rise under decentralized bargaining.
"We didn't expect such a large difference," Munch said. "Even those at the bottom of the hierarchy win under a flexible system."
The researchers found that employees with higher education and more seniority benefited most from the individual negotiations; their salaries increased by 7 percent over a 10-year span.
Employers also see benefits in treating each salary on a case-by-case basis. Munch said the research shows that companies are productive when they negotiate salaries individually because they are better placed to cope with changes in market conditions.
"For example, flexible wage systems make it easier for companies facing growing demand to retain key employees, while employees under threat of outsourcing can end up keeping their jobs at a lower wage," Munch said. "Our research sends a signal that decentralization actually makes it possible to identify areas in which more flexible wage bargaining makes units function more efficiently."
The study, co-authored by Christian Møller Dahl of the University of Southern Denmark and Daniel le Maire of the University of Copenhagen, was recently published in the Journal of Labor Economics.