This paper addresses two questions. First, under what circumstances will a centralized wage-bargaining system offer higher output and employment than a decentralized system? Second, what is the relationship between the degree of wage centralization and inflation? The paper argues that centralized wage setting may offer worse outcomes, despite the existence of a negative coordination externality in decentralized wage setting. This is more likely to occur when the legal and institutional environment strengthens the bargaining position of the union in the centralized regime compared with unions operating in a more decentralized regime. Furthermore, as product markets become more competitive, the macroeconomic outcomes in both regimes converge, and the degree of wage centralization becomes irrelevant.

This paper experimentally analyzes the effect of wage bargaining centralization (WBC) on macroeconomic performance. Our theoretical benchmark comes from that developed by Cukierman and Lippi (1999) to investigate the joint effects of monetary policy and labor market institutions on unemployment and inflation. We focus on the implications of two well known effects related to the degree of WBC: the competitive effect and the strategic effect. To do so we established a simple wage setting mechanism based on the existence of assorted levels of WBC measured by the number of unions in the labor market. In the three control treatments, unions' welfare and monetary rewards depend only on unemployment and wages, so wage pressures are expected to diminish with the level of centralization. In the other three treatments (the strategic treatments) subjects tackle both the competitive and the strategic effect as the rate of inflation affect union's utility and subject's experimental rewards. Our results show that (i) as wages are significantly higher in the control treatments than in the strategic ones, the strategic effect seems to work in the way described by our theoretical model; (ii) nevertheless, the strategic effect does not fully operate according to the theoretical forecast, as lower levels of WBC, for which competitive effect dominates, offer a better macroeconomic performance.