metadata: authors: 0: author: Commander, Simon
1: author: Staehr, Karsten
docna: 0: docna: The determination of wages in socialist
            economies : some microfoundations
docty: Policy Research Working Paper
subtopic: Consumption,Fiscal & Monetary Policy,Labor Markets,Labor Policies,Administrative & Civil Service Reform,Public Sector Administrative & Civil
            Service Reform,Inflation,Crime and Society,Democratic Government,Rural Labor Markets,Public Sector Administrative and Civil
            Service Reform,De Facto Governments
teratopic: International Economics and Trade
abstracts: cdata!: The authors address the issue of how
            wages are determined in socialist economies.  They
            distinguish between different types of economic regimes, in
            terms of how much decentralization is permitted and how
            extensive are market-based features or rules.  Wages are
            commonly assumed to be exogenously given in socialist
            systems, regardless of regime.  They show that this
            assumption is not warranted, given the use of
            incentive-based systems in these economies.  Both the
            classical planned economy and the partially reformed regime
            face the problem of motivating workers in the absence of
            monitoring and of such conventional penalties as
            unemployment.  The authors show that in cooperative settings
            the outcome can be lower productivity than desired and that
            in noncooperative settings the outcome can be higher wages
            than warranted.  They interpret the partially reformed
            socialist economy as an attmept to refine the motivational
            structure by introducing a manager between the planner and
            the workers.  They also present a preliminary treatment of
            an economic regime such as the one that existed in Poland
            after January 1990, where market-based rules almost fully
            predominate.  Their objective is to provide coherent
            foundations for wage equations that can be tested
            empirically.  The authors show wages to be strongly
            associated with prices and rather less strongly associated
            with productivity.
repnme: repnme: The determination of wages in socialist
            economies : some microfoundations
display_title: The determination of wages in
            socialist economies : some microfoundations
listing_relative_url: /research/1991/06/699956/determination-wages-socialist-economies-some-microfoundations
topicv3: Wage Determination m1326037 856,Inflation m1326709 0870F4727ACED1CF8525815C00471347,Criminal Justice m1326993 1014,Employment and Wage Data m1327013 2055,Macroeconomic and Structural Policies
            m1327380 439
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: International Economics and Trade
origu: Policy, Research & Ect Affairs
no_of_pages: 67
model_extractions: **Policy, Research, and External Afflrs**

# **Nlonal Economic Management**

WPS 713 'T'his paper- aproduct of thc National Economic Management Division, Economic Development Institute - is part of a larger effort in PRE to analyze the sources and dynamics of inflation in transitional socialist economies. Copies are availablc free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Olga Del Cid, room M7-047, extension 39050 (62 pages, with figures and tables).

Commander and S,aehr address the issue of how wages are determined in socialist economies.

They distingL.sh between different types of economic regime, in terms of how much decentralization is permitted and how extensive are market-based features or rules.

Wages are commonly assumed to be exogenously given in socialist systems, regardless of regime. Commander and Staehr show that this assumption is not warranted, given the use of incentive-based systems in thcsc cconomies.

Both the classical planned economy and the partially reformed regime face the problem of motivating workers in thc absence of monitoring and of such conventional penalties as unemployment. How do these regimes try to resolve the incentive problem?

In a centrally planned cconomy, the piecerate mechanism is an attempt to stimulate more effort among workers. But Commander and Stachr show, using game-theorctic models, that in cooperative settings the outcome can be lower productivity than desired and that in noncooperative settings the outcome can be higher wages than warranted.

They interpret the partially reformed socialist economy as an attempt to refine the motivational ,tructure by introducing a manager between the planner and the workcrs. One objective is to provide a framework in whichl workers and managers engage in a cooperative game to determine wages and output with the incentive structure given in effect by the planner. They show how this can yield undesired results, when managers and workers cooperate, playing a noncooperative game with the planner.

They present a preliminary treatment of an economic regime such as the one that existed in Poland after January 1990, where market-based rules almost fully predominate. Their objective is to provide coherent foundations for wage equations that can be tested empirically.

They prepare estimates for the partially reformed economies of Hungary and Poland.

Data and other limitations limit thc conclusions that can be drawn. But Commander and Stachr show wages to be strongly associated with prices and rather less strongly associated with productivity. Hence, wages should not be considered fully exogenous, even if institutional and other factors indicatc more exogeneity than would exist in a standard market economy.

Thc PRE Working Papcr Series disseminates the findings of work under wiay in the Bank's Policy, Research, and External AffaitsComplex. An objcctie eofthc scries is to getthcsc findings out quickly. cven ifprcsentations are less than fully polished. The findings, interpretations, and conclusions in thcse papers do not necess.arily represent official Bank policy.

Produced by the PRE Dissemination Center
# The Determinatlon of Wages in Socialist Economies: Some Microfoundatlons

# by Simon Commander and Karsten Slaehr

# Table of Contents

|Section 1:|Introduction|1|
|---|---|---|
|Section 2:|Wage Determination in the Socialist Economy|3|
|2.1<br>|Regime typology<br>|3<br>|
|2.2<br>|The centrally planned economy<br>|5<br>|
|2.3<br>|The partially reformed economy<br>|6<br>|
|2.4|The reiorm economy-second stage|1 0|
|Section 3:|Wage Determination in the Centrally Planned Economy|1 0|
|3.1<br>|Introduction<br>|10<br>|
|3.2<br>|Framework and some assumptions<br>|1 1<br>|
|3.3<br>|Cooperative wage bargaining: a dictatorial solution<br>|1 3<br>|
|3.4|The Stackelberg solution in a noncooperative<br>game|1 7<br>|
|3.5|Summary|20|
|Section 4:|Wage Determination in the Reform 1 Economy|2 0|
|4.1|Introduction|20|
|4.2|A cooperative game|21<br>|
|<br>4.3|<br>A cooperative game nested in a noncooperative<br>game|2 6<br>|
|4.4|Summary|31|
|Section 5:|Wage Determination in the Reform 2 Economy|3 1|
|5.1|Introduction|31|
|5.2|A cooperative game between manager and workers|32<br>|
|<br>5.3|<br>Concluding remarks|33|
|Section 6:|Some Preliminary Empirical Results|34|
|6.1|Introduction|34|
|6.2|Hungary|35|
|<br>6.3|<br>Poland|38|
|6.4|Concluding comments|41|
|Section 7:|Conclusion|41|
|Reference|s|4 2|
|Appendice|s|4 4|
# .Jction 1: Introduction

The inefficiencies particular to socialist economies have generally been traced to the absence of market based discipline and most especially, the weights given to full employment, price stability and low income dispersion. The resulting trade-off was historically presented in terms of systemic or macroeconomic rationality alongside microeconomic inefficiency 1. Yet increasingly this distinction has appeared irrelevant. In some instances, the extent of underlying macroeconomic imbalance was masked by recourse to heavy external borrowing and/or accompanied by attempts at piecemeal economic reform aimed at eliminating or reducing those imbalances. In general, the symptom of tension was the presence of acute goods market shortages associated with an excess demand regime. Less well perceived was the link between goods markets disequilibria and the demand for factors of production. Guaranteed full employment imposed excess demand for labour regimes generating some labour hoarding by enterprises 2. Such hoarding could readily coexist with labour shortages and indeed could exacerbate such shortages.

Clearly, persistent excess demand for labour and capital would appear to rule out any of the behavioural relations, even correlation, between standard macroeconomic variables. Thus, even the tendency toward wage expansion that might be presumed to exist when labour reserves are exhausted might be absent in the institutional setting of the classical socialist economy. Inflation could in principle be eliminated by an ex ante balancing of incomes and expenditures. An inability to balance revenues and expenditures could be expressed as open inflation but equally as repressed inflation or simply be denied -- hidden inflation <. The restrictions on the functioning of a labour market then dissociate the maintenance of full employmen **t** hrough changes in the real wage, imply further that labour allocation and sorting occurs independently of standard signals and that with low wage dispersion a conventional intertemporal accumulation of skills does not occur.

It is now evident with the benefit of hindsight that the coordination of economic policies in a centrally planned system proved consistently more difticult than anticipated. Incomes policies proved only partially effective as a balancing mechanism with relatively rapid growth in open inflation in a numbe; of economies, particularly those undertaking partial market-oriented reforms. On the real side of the economy performance was very mixed with apparently adverse dynamic outcomes. Table 1.1 demonstrates negative growth rates of capital productivity for the entire sample from the mid-1970s onwards. In addition, growth rates for labour productivity decelerated very significantly and universally from the early 1970s onwards.

These adverse dynamics have commonly been attributed to the inappropriate I Nuti (1988) 2 Bauer (1990); Kornai (1985) 3 Portes (1977)
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incentive structure operating in the system with emphasis-on the lack of private r- turns to effort. 'The incentive problem was widely recognized by planners and Table 1.1 Labour and Capital Productivity (average annual growth rates), 1966-85

||196|6-70|197|1-75|197|6-80|198|1-85|
|---|---|---|---|---|---|---|---|---|
||Lab|Cap|Lab|Cap|Lab|Cap|Lab|Cap|
|Bulgaria|8.1|n.a|6.2|-0.6|4.4|-3.6|3.5|-3.1|
|Czechoslovakia|5.5|n.a|5.9|1.1|3.7|-1.5|1.3|-3.4|
|GDR|5.0|n.a|6.2|0.1|4.4|-1.0|4.3|-0.4|
|Hungary|5.1|n.a|6.1|-1.5|4.5|-4.3|2.3|-3.1|
|Poland|4.0|n.a|7.3|1.0|4.3|-4.2|-0.1|-3.4|
|Romania|7.3|n.a|6.2|-0.3|5.8|-0.8|4.0|-4.2|
|USSR|6.3|n.a|5.8|-1.1|2.8|-2.9|3.1|-2.7|

Source: ECE-UN; cited in Nuti (1988), p<sup>367</sup> academics in socialist economies. While high material intensity, low quality capital goods and inflexible allocative mechanisms can explain part of this poor performance, the institutional framework, motivational structure and remuneration system are clearly central to explaining low productivity in the state sector. At the same time, the attentuation of private ownership and thet reward structure would exacerbate problems -- familiar also to a capitalist economy -- in monitoring performance and information asymmetry. Among other results, the absence of a conventional disciplinary mechanism -- su.:h as involuntary unemployment -- might be expected to facilitate shirking.

Despite widespread recognition that the lack of a conventional macroeconomic equilibrating mechanism in the system and the commitment to low wage dispersion has tended to dilute productivity growth, exacerbate wage pressures and been a component in the determination of the level of excess demand in the system, limited attention has been directed to the particular processes by which wages are determined in such economies. One assumption has been to view wages as largely exogenous. Yet -- as this paper attempts to show -- this is not appropriate once consideration of the incentive parameters is taken into account. We also aim explicitly to introduce incentive features particu.lar to a variety of socialist regimes where account is taken of the degree of ma-ketoriented reforms introduced into the system '.

This paper focusses on the issue of wage determination starting from the case of a classical centrally planned economy and then progressively introducing 4 It should, of course, be mentioned that there is an extensive literature on the Yugoslav experience with worker management/councils and more exotic ownership forms; see, inter alia, Ward (1958); Tyson (1979); Horvat (1986); Jones and Svejnar (1988). This paper explicitly does not concern itself wit) the Yugoslav case.
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market directed reforms.<sup>While such regime shifts have obviously to be</sup> attributed to range of factors, we attempt to show that such reforms generally represent attempts at changing the incentive and monitoring structure and hence involve significant changes to the process by which wages are generated.<sup>We</sup> approach the problem in a simple game<sup>theoretic</sup> framework and hence with regard to the compatibility of interests among agents in these regimes.<sup>We relate the</sup> wuge outcome to games involving, variously, workers, managers and the planner. The players in these games differ<sup>by regime,</sup> as do the outcomes of the gamea. An underlying concern of the paper is basically macroeconobaic as we wish to extract a set of strictura. wage equations that could be cast in a macroeconomic model. We further attempt<sup>to derive observable</sup> specifications. However, the paper attempts to ground these<sup>equations by providing some simple micro-</sup> foundations appropriate to<sup>the institutional and other arrangements</sup> characterizing the socialist economy.

The organization of the paper is as follows.<sup>Section 2 presents</sup> a brief dis,ussion of the institutional context in which wages and employment have been determined in socialist economies. A simple typology of regimes is presented that attempts to accomodate<sup>the features of the various reform measures</sup> undertaken in a range of socialist economies over the past twenty years. Sections 3 through 5 set up simple bargaining models feor the various regimes. In Section 6, drawing on Hungarian and Polish experience and data, we present some preliminary estimations of our wage equations and Section 7 concludes.

# Section 2: Wage Determination in the Socialist Economy

# 2.1 Regime Typology

Tne discussion that follows aims to provide summary treatment of :he key features of a range of socialist economy regimes with particular regard to the wage determinati3n. Clearly many particularities are glossed over or ignored; the objective is to encapsulate the basic regularities of the stylized regimes with which we intend to work. The<sup>characteristics</sup> of the regimes are crudely classified in Table 2.1. We distinguish four discrete regimes -- the classical centrally-plann **e** d conomy (CPE), the partially reformed socialist economy in a first phase (RME), a reformed socialist economy in its second phase (R2E)<sup>and</sup> a standard capitalist economy (CE). No strict linearity<sup>is implied by the</sup> classification which is more aormative than theoretical. Rather, the typology broadly captures a series of historical experiences among European socialist economies. In general, however,<sup>the transformation</sup> has followed a linear process. Movement away from the CPE has involved a transition to an economy with RlE features. Hungary after<sup>1968 and Poland from the early 1970s might be</sup> considered as RlE economies. Advanced<sup>reform regimes (R2E) with features</sup> increasingly akin to those of a standard capitalist economy have been a more recent feature (for example Poland<sup>and GDR in 1990). The majority</sup> of countries remain effectively located in RlE regimes.

For the purposes at hand, the distinction between the latter and the CPE relates to the change in the rules determining wage fixing; the introduction of new actors -- namely managers<sup>--into the wage bargaining framework and the</sup>
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Table 2.1

**I**

||CPE<br>..|.<br>RIE|R2E<br>..|.<br>CE|
|---|---|---|---|---|
|1.Ownership of enterprises|<br>state owned|state owned|primarily<br>state owned|largely private|
|2. Allocatio,<br>of<br>production inputs|plan|plan/free|free|frga|
|3.Setting of<br>factor prices|plan|plan/free|market|"riWt|
|4.Allocation of<br>labor Lnput|plan|plan/free|free|free|
|5. Setting of wages|plan|free/rules|markec / wage<br>taxation|market|
|6. Allocation of<br>consumer<br>goods|plan|plan/free|free|froe|
|7. Setting of<br>consumer prices|plan|plan/free|market|market|
|S.FLros.<br>budget<br>constraint|soft|soft|soft/hard|hard|
|9. Unemployment goal|no<br>unemploymene|no<br>unemployment|accepts<br>unrnployment|accepts<br>unemploymenc|
|10. Tax policy|turn overtax|turn-over<br>tax<br>profit taxed|incomstax,<br>VAT|income tax,<br>VAT|
|11. Sub#idled|often<br>significant|often<br>significant|re-ove|**few**|
|12. Government*<br>budget constraint|soft/hard|soft/hard|soft/hard|soft/hard|
|13. Monetary policy|passive|rassive|contingent|concingent|
|14. Separate central bank<br>andretail<br>banks|no|no/yes|**tosome**<br>extent|**yea**|
|15. Ownership of<br>reeas1banks|**state**|state|seate|private|
|16.Retail<br>banks'<br>budget<br>constraint|soft|soft|soft/hard|hard|
|17. securLties markets|no|no|no|yes|
|16. foreign trade|state<br>monopoly|state+<br>enterprises|free|free|
|19. Exchange rate policy|fixed,<br>rationed|fixed,<br>rationed|fixed/flexible|fixed/flexible|
|20. Convertibility|no|no|yes (current<br>account)|**yes**|
general shift in planner's preference toward goals not strictly denominated in quantity terms. However, no parametric shift occurs with regard to employment; nor with regard to the budgec constraint facing enterprises. In short, the RlE stage represents sele-tive market-oriented reforms with prices still largely administratively determined and resource allocation driven by the planner or central authority. To t'."Xt extent, both x 7orm economies (RlE and R2E) represent degrees of decentralizacion with respect so the base CPE structure. While the R2E economy bears most of the characteUistics of a capitalisr regime, the thinness of financial institutions and the ownership structure continue to create an effective distinction. Retention of the soft budget cons traint has potentially powerful implications for the wage bargain.

# 2.2 The Centrally Planned Economy (CPE)

The CPE that was the characteristic organizational form for most socialist regin;ss until the 1970s (and in some cases -- such as Bulgaria, Romania and Soviet Union -- until almost the present day) was based on vertical controls, with the planner coordinating economic decisions. Enterprise autonomy was severely circumscribed and management was largely a transmission belt for orders emanating from the planner. Trade unions lacked autonomy and full employment was a given. Commands issued to agents and monitored essentially in quantities proceeded on the basis of a theoretical balancing of input and output flows. Similarly, revenues and expenditures were balanced with financial flows accomodating planned physical flows. Wages were commonly set at low levels and were compressed in their dispersion. A significant wedge between direct lrbour costs to enterprises and household income emerged given the weight of transiers and subsidies in total income. This generally implied low absolute wages but relatively high aggregate household income. Wages were consistently subject to centralized controls. These were critical for achieving balance between aggregate revenues and expenditures as also for restraining the tendency for labour market rents to be extracted out of a system where conventional ownership and market disciplines were absent.

Several well-recognised tensions emerged from this system. In dynamic terms, once labour reserves have been exhausted, the mechanism for output growth was necessarily greater capital infusions. Growth depended on new investment with higher capital-labour ratios and/or changing the product-mix toward more capital. intensive goods. Depending on the income elasti 'r of consumer demand for capital and labour-intensive goods, satisfying consum.L demand could have adverse consequences for growth. By the same token, this could yield exaggerated mismatch between consumer demand and the structure of aggregate output °. This dynamic inefficiency reached down into the wage process. When labour shortages emerged and the penalty that could be exacted by the planner from the worker for inadequate effort was absent or difficult to enforce, the only feasible mechanism for inducing greater worker effort remained piece-rate wage adjustment. The use of piece-rates attempted to get round the monitoring problem. The issue turned not only on the costs of monitoring individual effort but also, given the absence One implication of this being that any shift in prefe,ence on the part of the planner toward satisfying consumer demand would have a correspondingly negative effect on output; see Weitzmann (1970).
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of a true management agency, in monitoring enterprise<sup>performance. To the extent</sup> that an information constraint emerged, the planner<sup>would tend to select a</sup> control<sup>4</sup> .nstrumen **t** hat, in principle, harmonized<sup>with the overall</sup><sup>_emphasis_</sup> on physical -- hence monitorable -- targets. This<sup>meant that regulation of the</sup> wage-bill of enterprises became the other key control mechanism<sup>in the hands of</sup> the planner 6. The enterprise wage-bill was in effect constructed<sup>as abase</sup> wage with a piece-rate adjustment **7.** The use of above-ncrm payments as motivational devices became a widespread feature of CPEs. By 1960 90-95% of Soviet industriel<sup>workers were paid some sort</sup> of incentive wage and over 60% were on piece-r.tes 8, However, to the extent that piece-rates resulted in aggregate demand effects,<sup>the likely consequence</sup> was a further divergence of the planned supply of consumption<sup>goods from notional</sup> demand, given limitations on factor substitutions and the higher c&pital/labour ratios in production required to sustain growth.<sup>Shortage moreover induces</sup> observable spillover effects in consumer markets<sup>9.</sup> To the extent that the leisure choices of workers are constrained **1',**<sup>rising excess demand (assuming</sup> that wage payments were not matched by availability of consumer goods), mirroild in higher than desired money balances, would exert<sup>influence on the relative</sup> effort applied by workers.

In short, the full employment regime imposed<sup>aweak incentive base.</sup> Attempts to raise X-efficiency by piece-rate payments<sup>further tended to have</sup> implications for balance In goods markets. Combined<sup>with the tendency fot</sup> exhaustion of labour reserves to promote a structure<sup>of output-</sup> that worsen.d consumer goods market disequilibria, this restrained the<sup>viability of sustaird"</sup> use of piece-rstes to motivate workers.

# 2.3 The Partially Reformed Economy (RIE)

Characteristically, reforms to the CPE emphasized<sup>some measure of</sup> decentralization of decision-making; the underlying objective being to simulate some of the motivational features of a market<sup>economy while retaining the basic</sup> ownership structure and redistributive traits<sup>of socialism. Generally, greater</sup> autonomy for enterprises was accompanied by<sup>measures to associate domestic with</sup> 6 CPEs generally started out by regulating the average wage but fairly rapidly moved to regulation of the wage-bill.

7 A wide variety of systems were tried at various<sup>stages; most aimed at</sup> improving the incentive structure and/or providing<sup>enterprises with stimuli to</sup> reduce labour absorption. In general, the wage-bill<sup>was defined as paid-out</sup> wages and bonuses. In the late 1960s, separate bonus<sup>funds were established;</sup> see Adam (1979) ppxviii/xix.

8 Kirsch (1972), pp<sup>41</sup> /<sup>42</sup>

- 9 See, for example, Podkaminer<sup>(1988)</sup>

10 Simply 'exiting' from work has generally not been feasible, as legislation against 'parasitism' suggests.
.7 interv-ational pr'?Jes, to allow, in some caszs, enterprises to have ditect accers to technology and other imports " and by greater tolerance for unofficial or parallel markets in both goods and currency. Such measures were very tentatively initiated (but then reversed) in Poland and Czerhoslovakia in the late 1950s and more systematically in Hungary after 1968 and Pcland after 1.973/75.

Decentralization involved the central authorities relinquishing the right to set physical output targets and centrally allocate inputs and materials. Given concentration and market power, supervisory agencies were generally retained with a view to containi.,g price expansion by monopolists. This also cohered with the discretionary realloc-ati **o** fn resources by means of the tax system, subsidies and refinancing credits issued through the Central Bank.

Despite specific country features, certain regularities can be isolated. In general, devolution of controls implied some measure of worker selfmanagement, normally through enterprise councils or partially accountable entitier. In Poland by the early 1980s workers' councils had been established in over 6000 enterprises while in Hungary later measures resulted in around 73% of state enterprises being transformed to management by councils 2. From the perspective of this paper, this transition implies, first, the possible creation of a new player in the game linking plant to planner. Under the partially reformed system a diluted managerial role emerged, given the weakening of planned outputs and allocations. This generated a more complex set of games between enterprise and planner covering subsidy, tax eligibility and other negotiable arrangements; it also generated the potential for firm-specific bargaining.

Decentralization also raised the issue of the manager's function and motivation. Clearly, in a market economy, with a division between owner and manager, motivation depends variously on labour market rewards, earnings based incentives, share or stock options and any discipline exerted by external valuation on the viability or independenc if the enterprise. rhese incentives are largely absent in the RlE. In fact, the only consistent motivational mechanism has been wage and performance-related bonus payments; themselves in part constrained by the political acceptability of wider income dispersion ". Further, precisely because of the horizons generatee by the system of social ownership, the need to regulate the size of the incentive payments was recognized. In general, the wage premia paid to enterprise managers was explicitl' associated with performance or synthetic indicators with penalties levied if wage expansion Was in excess of the growth in the performance " With commonly disastrous consequences involving later socialization of the debts incurred by unsatisfactorily regulated enterprise borrowing, particularly in Poland.

12 However, central and party interference in the composition of management committees remained widespread. For a summary of the inst :utioa%l changes, see IMF (1989a and 1989b).

13 Political opposition to wage differentiation was one main reason for the failure of the 1969 reforms in Hungary; see Soos (1987).
indicator 14. The same basic tension existed for managers as for workers with respect to the possible appropriation of labour rents. Hence, :he external imposition of wage and bonus norms on both mana3ers and workers. To that extort, as we make explicit in Section 4, the manager and workers' interests might coincide, allowing them to act coope.^atively against the planner.

Decentralization in RlE systems has normally been linked to some form of tax-based incomes policy or method of wage regulation imposed on the enterprise. The exact design of svch systems has varied widely, acting on either the wage bill -- the sum of enterprise wages and bonuses -- or the rate of wage growth with wages related to some measure of performance. The frequency of changes to the system suggests the difficulty in isolating the appropriate synthetic _measures '._ Tax-based incomes policies (TIP) were in principle designed<sup>to</sup> achieve several objectives. )'ir3t, to restrain appropriation of labour rents; second, to regulav..e effective demand and goods market imbalances and, third, to regulate enterprise demand for labour and to achieve a moLe efficient allocation of labour within the full employment constraint. The actual design o' the TIP would then in part depend on the relative weights attache;' to these objectives. Giving priority to regulating enterprise labour demand, for example, generally implied control of the wag, 'ill.

The complexities in the design of wage controls are explored in detail elsewhere "'. Several consistent, *nderlying tersions in the approach characteristic of RlE regimes can be isolated from a raige of country experiences.

* Associating the wage path to that given by productivity proved problematic given the set of price distortions and offsetting taxes and subsidies that remained in the system. Sound indicators of financial performance were not transparent, necessitating frequent adjustments to wage control parameters.

* To the extent that wage formation was solidaristic and wage increases converged to the upper limits, the outcome would be an acceleration in inflation given the diluted discipline exerted on tradables prices by international prices. Equally, inflation could be repressed via price controls.

a Reliance on plant-level productivity adjustment had the obvious disadvantage that it could pull apart the wage distribution<sup>across industries</sup> on the basis of no sound indicator; given the structure of distorted<sup>prices.</sup> A preferable approach in any event would have been to link labour<sup>cost increasas</sup> to economy-wide productivity expansion.

" Such premia could amount -- as in Hungary -- to as much as 50% of the total wage; IMF (1989a).

" Between 1968 and 1989, there were seven major changes in the wage regulatory system in Hungary while in Poland there were six s bstantive changes in wage regulatior betwen 1981 and 1989.

'6 See, for example, Adam (1979) and (1982); Granick (1987); Marrese (1981); IMF (1989a and 1989b)
-9-

* Using the wage bill to regulate labot demand would only f-end to change the intra-firm ski.ll composition -- with a resulting bias toward unskilled, lower wage categot:ies -- and hence have an impact on replacement policy. Little efficiency gain might then be expected.

* Without basi" political acceptance of expanded wage differentials, policies aimed at using wage diffentials as a motivational device have tended to fail. Solidaristic wage outcomes likewise counter any presumed incentive outcome. If decentralization proceeds alongside greater tolerance of the private or parallel saczor, effo:t will be redirected to uncontrolled activities with adverse productivity implications for the socialist sector.

* Soft budget constraints for enterprise managers and short-run wage maximization objectives on the part of workers would tend to cluster wage demands at the upper limits of the permissible payment irrespective of performance.

* Any incentive effects intended to be arsociated with productivitv and skill related adjustments would tend to be diluted by a falling or low w of wages to total earnings t.

* The effecti-_vness of any tax-based incomes approach depends on the ability to enforce the penalties t8. To the extent that such 'control-byconsjnt' is absent. more complex bargaining will emerge. This appears to fit tba Polish RlE experience since the late 1970s. The outcome is accelerated wage drift and the inefficacy of wage controls as a tool for demand management.

* Ther:e is an inevitable tension batween using wage controls for macroeconomic objectives -- particularly excess demand in goods markets -- and for incentive purposes if ex ante excess demand is significant (and monetary overhang high) and supply elasticities low.

In summary, shifts to RIE regimes were attempts to address urtde '.ying incentive problems in the CPE and thereby raise productivity. The outcomes were inevitably ambiguous. Wage regulation could contain wage drift under certain conditions, including passive unions. The Hungarian system appears successful on this score over most of the 1980s. By contrast, where bargaining reflects a basic argument ovez the wage level and political power -- as in Poland -- incomes policies tend to be ineffectual in managing lemand as also on motivational grounds.

" It is instructive to note that for Hungary between 1984 and 1988 wages averaged 38% of total cash receipts; social benefits in cash, 22% and other receipts including Drivate economic activity, 24%. See; C.S.0 Monthly Bulletin of Statistics.

1' Particularly problematic in a RlE where bargaining over exemptions and special treatment remains endemic. See Gomulka and Rostowski (1984).
- 10 -

# 2.4 The Reform Economy - Second Stage (R2E)

Little experience is now available, given the recent nature of the changes in Poland and former GDR. Broadly, the objective of the regime shift is to induce lore completely market-based features in these economies through trade liberalization, convertibility and the direct importation of international prices. Fiscal discipline, autonomy of the monetary agency and elimination of the conditions supporting a soft budget constraint for enterprises are other components. Unemployment, wage dispersion and enterprise failures are tolerated. In princivle, the R"E regime is supposed to behave 'ike a capitalist one; the main obstacle being ownership righcs and budgetary transfers. In principle, the latter can be addressed by pre-announcing a fiscal correction and pursuing a restrictive monetary policy 19. The ownership issue is less tractable. Not only is there high concentration but also a large weight of socialized enterprises in total industrial activity. In Poland roughly 8000 state enterprises account for about 90% of industrial output. Rapid divestiture raises major questions regarding valuation, distributional and wealth effects. To the extent that divestiture cannot be rapid, the question remains whether hard enterprise budget constraints can be consistently enforced.

From the angle of wage regulation, this weight of the socialist sector requires retention of certain wage controls, particularly in the context of a stabilization. As usual, the design of the TIP is critical. For example, maintaining controls on the wage bill -- as occurred in Poland in 1990 -- would only tend to aggravate unemployment in this new context. Wage controls are also likely to have undesired effects for an emerging private sector. For this reason, private sector wages have been fully liberalized in Poland. The main tension remains permitting wages to allocate labour and serve as a standard incentive mechanism while maintaining macroeconomic balance in an environment where the rules are not fully perceived as having changed. To the extent that profit maximization and the associated penalties genuinely obtain, bargaining models developed in t1e context of market economies are likely to be relevant.

# fSction 3 Wagg Determination In the Centrally planned Ecom

# 3.1 Introduction

We now set up wage games appropriate for a CPE, incorporating an incentive payment applied through a piece-rate, and establish the outcomes of these games in both cooperative and non-cooperative settings 20. We are able to show that the workers' reaction to an incentive payment can either result in reduced productivity/effort or a higher than desired wage level and excess demand in good markets.

> **19** Because of the ex ante structure of borrowing and inter-firm credits, such an approach may be costly and a poor discriminator of underlying viability, see Calvo and Coricelli (1990).

> 20 Throughout the paper wages refer to total remuneration including piece rate, bonus and other fringe payments.
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# 3.2 Framework and Some Assumptions

We assume that there are two important players in the CPE: the Planner and the firms.a The latter are comprised of identical Workers; there is no distinct management. There is a representative Worker's utility function. With no unemployment in the CPE, this function includes effort and the expected real wage. An increased expected real wage (W/P) increases consumption possibilities either now or in the future and utility is hence a positive function of the real wage. The relevant price index is the consumer price index 1. We assume that the Workers form their expectation of this period's price level in terms of the previous period so that PI can be considered an exogenous variable.

Utility is a negative function of the effort (Z) delivered.3 The underlying argument is that the Workers face a trade off between work and leisure and prefer less hard work. For convenience we choose an additive fo.mulation of the utility function.

Uw - u(Z) + v(W/PF) We assume that u'(Z) < 0, u"(Z) < 0, v'(W) > 0, and v"(W) < 0. That u"(Z) < 0 follows from the fact that the disutility associated with a high effort increases with more effort. The indifference curves will be upward sloping in the 'effort - wages space.

The Planner's role is to set economic targets and achieve them. In doing so, the Planer might be concerned about a number of objectives, including the volume of investment, private consumption, growth, income equality, price stability, and the degree of excess demand on the goods markets. This can be treated in the following way. The Planner has multiple objectives, the rec ncilation of which consistently imposes a tension on the system. To achieve the objectives, the Planner allocates the whole labor force, n, to production. The output price level from the last period, P, is maintained. Finally, the Planner sets a certain minimum wage calculated per time unit. We call this basis wage, Wis.

# 2 In section 3-5 a closed economy is assumed.

2 It can be argued that in an economy with chronic excess demand for goods the real wage is not a good measure for the consumption possibilities of a certain nominal wage. However we have chosen not to include any measure of the rationing at the goods market. The reason is that there is no a priori knowledge of the way excess demand on the goods market influences the workers' desired wage. One argument is that a rationed goods market will lead to less wage pressure, cf. Ellis and Fender (1985), while another view is that the workers will compensate for the present goods rationing by demanding .aigher wages (for later effective consumption or for purchase of goods at the black markets). Charemza and Gronicki (1983) call this last argument "wage illusion".

> 2 A formulation of the worker's utility function close to the one chosen here can be found in Sokolovskii (1987), p5.
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The Planner also seeks high production, hence growth. To yield these targets a plan which sets the guniLty of the governments' investments and other expenditures (I) along with the private consumption (C) is developed. Since the economy is closed we have that the Planner will have a planned production target (Ypw) equal to: Yp,,, - I + C The Planner gives priority to fulfilment of Ypw and deviations from the target leaves the Planner with the utility -00.

This model is a fixed price model and hence we can have that the Workers' notional demand for goods can exceed the effective supply. If this is the case, then we assume that the private consumption is rationed,2 ' We assume that the Workers have no voluntary savings. This means that the Workers' notional demand is equal to their income Wn. Excess demand can hence be written as: X - Wn - PI - PY, where Y is the real production. We assume that the Planner prefers zero excess demand and every deviation from this target decreases the Planner's utility. We also assume that the economy is initially in a situation of excess demand which implies that once Y>- is attained the Planner's utility increases as the wage decreases.

The CPE has one firm managed by the Planner. The firm's production function can be written as:

# Y Zf(n)

The production is a function of the labour input and its technical productivity, f(n), multiplied with the measure for the effort/productivity delivered by the Workers, Z. It is assumed that f(n) > 0, f'(n) > 0, f"(n) < 0.

We have chosen a particular utility function for the Planner. Once the production target is reached, utility decreases quadratically as the excess demand deviates from its "optimal" value, zero. If we use the above formulation of the utility function we can write the Planner's utility function as: We have assumed that n is exogenous, so the Planner will need an average - productivity equal to Zpt Yp-/f(n) to fulfill the plan. Therefore, if the productivity is Zp and the wage is W - (P/n)(Zpvf(n)-I) the Planner attains maximum utility (equal to zero).

I In similar vein to Ellis and Fender (1985) and other fixed price literature.
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Due to the very centralized management of the firm the Planner has limited possibilities for monitoring the work more and hence cannot rely on flexible or nuanced payment schemes. Hence, to motivate Workers the Planner has recourse to piece-rate payments ". We have chosen the following formulation for the piece-rate payment: W - _W,, +_ **_CZ_** (3.4] Wb. is the core wage determined by the Planner according to social and distributional preferences, a denotes the piece-rate payment with Wale 2 0, a 0.

# 3.3 Cooperative Wage Bargaining: A Dictatorial Solution

In this section we look at the wage determination&as a cooperative game with the wage (and the effort) being the result of bargaining between the Planner and the Workers. For the time being, we assume that the Planner and the Workers do not take into account systems for monitoring that the result of the bargain is actually adhered to.

The Planner and the Workers have the utility functions Up and Uw. Let Up denote the Planner's threat point and Uw the Workers' threat point." Let 0 (O < e s 1) be the Planner's bargaining power. Hence 1-0 is the Workers' bargaining power.

The Nash-Zeuthen-Harsanyi (NZH) solution to the cooperative game with two players is found like this:" Max ( [Up - Up IeUw - Uw]4 } **W.Z** We assume for the Workers' threat point; Uw - u(O)+v(W,w/P6), a situation where the Workers choose not to deliver any effort at all and hence just receive **Wb.** We assume that the Planner has an arbitrarily given threat point Up (< Up). We get:

- - Max ( [Up Up]e[Uw (u(O)+v(WU./P))141 ) w,z

(3.5] Equation (3.5] denotes the NZH solution to the bargaining between the Planner and the Workers as a function of the bargaining power 0. The set of bargaining I Extra-ordinary payments for above-norm effort have also been commonly employed; see Adam (1979).

**6** The threat point denotes the lowest utility the player will accept as result of the bargaining.

2 See Friedman (1986) chp. 5 for a standard treatment of the cooperative game. Svejnar (1986) contains a very good presentation of the Nash-ZeuthenHarsanyi solution for an asymmetric bargaining game.
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# solutions (as Q varies between 0 and 1) is the efficiency locus.

Let us discuss the shape of the efficiency locus. If the bargaining result implies that the Workers' productivity is different from Zp,,, the PlaWer's utility Up will be -0. The Planner will then stick to the threat point Up and hence the product in [3.4] will be zero. To avoid this, the average productivity must be Zp,. The Workers' utility can never get below u(Z)+v(Wb/P) since the Workers' gain from the bargain in that case would be negative. From this we have that the efficiency locus will be the points on the Z,. line lying above the point where the Workers' indifference curve u(O)+v(W,./PE) intersects the Z7., line. If 0 is big (the Planner has large bargaining power) we will get a solutio **n** ear the intersection. As e becomes smaller the Whole line of solutions will be traced. The efficiency locus (the NZH solutions) is drawn in figure 3.1 as a bold line. ThM point, D, is where the indifference curve u(O)+v(WM,/PO) intersects the Zpm line.

<!-- Start of picture text --> Figure 3.1<br>W' \ / u(o)+v(Wb./r)<br>WhaI<br>ZIM<br><!-- End of picture text --> We now look at a special bargaining solution, namely the one where the Workers' indifference curve u(O)+v(W"/P) intersects the Zp, line. This is the NZH solution to the problem in equation (3.5] in the limit case where e -. 1. We will call this particular solution the 'Dictatorial solution' since it is the outcome of a bargaining where the Workers have no bargaining power and the Planner dictates the result of the bargaining. It can be written as the vector (WO,Z ), such that: ze U(Z )+V(W/r) _-_ U(O)+V(Wb/P<sup>0</sup> ) t [3.6] [3.71 8 - . 1, but e + 1 (since if 8 was equal to 1 then the Workers would stick to their threat point).
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The Planner will choose to produce the planned output and pay a wage Just exactly suffiLient to keep the Workers from delivering zero effort. The Dictatorial solutlon can hence be interpreted as a solution where the Planner maxLmizes the utility Up glven that the WorkersI utility is squeezed as much as possible.

We now return to the monitoring problem. How can the Planner be sure thet the Workers will actually deliver the agreed upon effort, Zw,,, for the DictatorLal solution? The only thing the Planner can monitor is the actual production. To avoid the Workers receiving the payment W' but delivering, for example, no effort, the Planner pays the Workers according to the pLece-rate system described above. The Planner chooses a piece-rate a such that the sum of the base wage and the piece-rate payment equals the agreed wage W; Wb.+*Zp4,,, - W1 (3.81 This implementatione of the Dictatorial solution is illustrated in flgure 3.2. The Planner will choose a piece-rate **_0a_** such that the 1ine W - Wb+OZ passes through the point D.

<!-- Start of picture text --> FLgure 3.2<br><!-- End of picture text --> <!-- Start of picture text --> u(O)+v(W>./P)<br>z-J,<br><!-- End of picture text --> <!-- Start of picture text --> zpw<br><!-- End of picture text --> The Dictatorial solution implemented via a piece-rate system (given by the equations [3.5], [3.6], and [3.7]) is, however, unstable. In this set-up the Workers de-ive nothing from the bargain yet have the possibility of reneging on the outcome 3. Once the Workers realize that _(a_ ,Zp1.) from equations [3.6](3.8] is the outcome of the bargain they can react by playing the game in a noncooperative manner. This means that, given the piece-rate _a_ the Workers will S The piece-rate is _a'_ - (W'-Wtw)/Z&,.

X Note that wb> is exogenous and predetermined. If this was not the case the Planner could always adjust the base wage so as to make whatever combinatlon of wage and productivity level a stable solution.
* 16 -

decrease their productivity (and their total wage) to increase their utility. This behavior is illustrated in figure 3.3.

Flgure 3.3 <!-- Start of picture text --> Wb.+(4dZ<br><!-- End of picture text --> The point, D, again denotes the Dictatorial solution. The point D' will be the Workers' optimal combination of wage and effort given that the Planner has chosen the piece-rate a.

From the above discussion, it can be seen that the Dictatorial solution tends to be unstable, since the Planner has not taken into account the Workers' reaction on disclosure of the piece-rate a. This relates to the uneven nature of the bargaining '. To the extent that the solution sticks, planned production will always be attained, the wage will be relatively low and the likelihood and/or the amount of excess demand will hence be relatively small.

We now examine the Dictatorial solution more closely. We know that the productivity Z will be Zpw and that the wage can be found from equation [3.7]. - By inserting Z Zpt in equation [3.7] we find W* from: .

u(Zpn)+v(W'/P) - u(O)+v(W./P')

[3.9] From this we write the Workers' wage as a function of the base wage, the planned productivity, the price expectations, and (formally) the Planner's threat point: The sign pattern i,s derived in Appendix 1 and '.ndicated by the signs above the 31 Note, however, that certain features of the CPE, make achieving a dictatorial solution not wholly improbable. These features have included; an absence of trade unions and a powerful repressive apparatus.
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variables in equation (3.10]. An increased base wage will lead to a higher total wage since it is now more attractive for the Workers to stick to their threat point, i.e. not to work. When the planned productivity is increased, the total wage rises; this follows from the curvature of the Workers' indifference curves. Finally, an increase in the Workers' price expectations do not necessarily lead to higher wages. A higher expected price means lower real wages which is not desired. However, the real value of the threat point's W" also falls. The resulting effect is uncertain. The Planner's threat point does not affect the optimal wage.

# 3.4 The Stackelberg Solution in a Non-Cooperative Game

We continue by examining what the Planner can do to prevent the instability shown above. The wage determination game is non-cooperative and we examine what happens if the Workers' reaction is taken into account by the Planner. We work with the same Planner and the same Workers as described in section 3.1. The Planner is assumed to be a Stackelberg leader.

We assume the following "sequencing" of the non-cooperative game. Basically the Workers produce the output and hence determine the effort while the Planner pays wage to the Workers. The Workers decide on their productivity given the offered wage. We assume they take into account that the Planner uses a piece-rate remuneration system.

# Workers' Reaction Curve

For every value of the piece-rate a which the Planner chooses, the Workers will choose an effort maximizing their utility. The set of effort-wage combinations derived in this way is the Workers' reaction curve. We find it by maximizing the Workers' utility function subject to a given piece-rate. The Workers' problem is: lax ( u(Z) + v((Wb.4GZ)/P) 1 The first order condition leads to the reaction curve given implicitly by equation [3.11]: u'(Z) + v'((W.4+aZ)/r)(U/P) - 0

[3.113 Figure 3.4 gives a graphical illustration for the construction of the Workers reaction curve. As regards the shape of the Workers' reaction curve, it will - always originate in the point (Z, W) (0, Wb.). The reaction curve will tend to move upwards being led by the increasing piece-rate. However, segments of
<!-- Start of picture text -->
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**Figure** 3.4

**W**

<!-- Start of picture text --> Workers' reaction curve<br><!-- End of picture text --> the curve can easily be backward bending, this being a consequence of the income effect dominating the substitution effect.

# Ti Planner as Stackelberg Leader

The Planner playing the non-cooperative game as a Stackelberg leader regards the Workers' reaction curve as the possible combinations of effort and wage. The Planner's problem is hence to maximize profit given the possibilities depicted by the Workers' react'on curve and given that the Planner only can change the piece-rate parametEr a. The Planner's problem can be written as: Max Up s.t. u'(Z) + v'((Wb..4wZ)/PI)(a/PI) - 0 [3.121 As a Stackelberg leader the Planner maximizes Up by paying a total salary given by the lowest point where the Workers' reaction curve crosses the Z*- line. That is, the Planner chooses the piece-rate a where the line Wb.+a Z passes through the lowest intersection point between the Workers' reaction curve and the Zpw, line. This point is called S in figure 3.5 and is the Stackelberg solution.

From figure 3.5 we can derive two important results: 1) The Stackelberg solution is stable in the sense that none of the players have any incentive to deviate from the solution. The Workers cannot get higher m See Appendix 2 for a detailled discussion of the shape of the reaction curve. There is nothing preventing the reaction curve from looking for example like this: <!-- Start of picture text --> fZ<br><!-- End of picture text -->
<!-- Start of picture text -->
-19-<br>Figure 3.5<br>>%w  Workers' reaction curve }<br>WbI<br><!-- End of picture text -->

utility given the piece-rate oa. (Their indifference curve just tangents the point S). The Planner can not get higher utllity by lowerlng the piece-rate, because then the production will fall short of the production target.

2) The wage will normally be higher for this solution than for the Dictatoital solution found above. This makes sense given that in the case with the Dictatorial solution the Planner squeezed the Workers as much as possLble, l.e. to their threat point, while in the case of the Stackelberg solution the Planner took the Workers' reaction into account.

However, as a consequence of the relative high wage payment implied by the Stackelberg solution it is very likely that there will be significant excess demand on the goods market. This is a frequently observed phenomenon in CPEs, which (at least partially) can be explained by a high wage pressure stemming from the non-cooperative functloning of the labour market 3. In conclusion, the Stackelberg solution proved stable but had the drawback that the wage would tend to be relatively high with a large excess demand on the goods market as the result.

Because the Workers' reaction curve can contain backward bending segments the multipliers cannot be calculated just by using the Implicit Function Theorem. However, by adding one extra assumptlon (namely that v3(W) > 0) we can still sign the multipliers. The solution to the Planner's problem (expression [3.12]) is to choose the procuctivity Z - Z and then the lowest piece-rate a satisfying the equation for the Worker's reaction curve. That is, the Planner chooses a as the lowest g satisfying 1' A special case can occur when the reaction curve is backward bendlng. If the reaction curve bends backwards before it reaches the productivity target (the ZO, line) the Planner will never be able to obtain the planned production.
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u'(ZP,) + V'((Wb.,+oZp1.,)/P)(a/P9) - 0 If we assume existence of a Stackelberg Equilibrium, the Planner will choose the wage (and hence the piece-rate) occuring at the lowest point where the Workers' reaction curve intersects the Zw- line. By using this reasoning the multipliers for the Dictatorial solution can be calculated (See Appendix 2).

(+) (+) C W - fnW M., ZPh, P) It should be noted that the wage initially will be higher in this situation than in the earlier case. Furthermore, while the multipliers have the same signs as for the cooperative game they will generally n= have the same size.

# 3.5 Summary

In our treatment of the CPE we find that the combination of centrally determined production targets and piece-rate remuneration lead to either, (a) unstable solutions with a tendency for under-attainment of production targets, or (b), stable solutions with a likely high level of wages and significant excess demand in the goods market.

## Section 4: Wage Determination In the RefEL I Zggp=

# 4.1 Introduction

The main features of the RlE have been discussed in Section 2. The regime might be considered a partial response to the incentive problems associated with the CPE involving greater decentralization. In particular, the RlE has implied greater autonomy for the workers and the managers in the setting of production, investment and remuneration at their firms with explicit association of remuneration to a performance indicator. One underlying argument for the reforms that installed an RlE regime was that by imposing the 'right' incentive structure on the managers the latter would balance the workers' demand for higher wages and/or ensure that the workers deliver a high effort. To phrase it slightly more technically, the reforms aimed to engage the workers and the managers in a cooperative game determining production and remuneration. The government could then choose the outcome of this game by imposing the 'right' i-centive structure on the workers and the managers.

Our hypothesis is that the actual outcomes of the reforms deviated significantly from intended outcomes. Especially in Poland, the government became engaged in a game witV the workers and managers concerning the allocation of resources in the economy. This game can be stylized as one where the workers and managers played (more or less) together against the government or planner.
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This section will model two games. Section 4.2 deals with a cooperative game between the managers and t'te workers with an exogenous incentive structure imposed by the planner. This game is in reality a two perso.. game with the planner as nature. Section 4.3 sets up a three player game which is cooperative between the managers and the workers and non-cooperative between these too and the government or planner.

# 4.2 A cooperative game

There are two players, the Manager and the Workers. The Planner's preferences do not appear directly but the Planner's policy and the institutional arrangement influence the outcome of the co3perative game. Hence, the Planner's behaviour represents nature and is exogenous to the Manager and the Workers. We impose the same assumptions on the Workers in the RlE as for the CPE. To simplify the calculations we have chosen to set the price expectation variable r - 1. The Workers' utility function now reads; Uw - u(Z) + v(W) We use the same production function as in section 3 and assume employment at the firm to be exogenously given by the Planner as n. The Manager's utility is assumed to be a function of the remuneration received. The Manager's total remuneration (R) is a fraction (a2) of the firm's profit (PZf(n)-Wn) and a fraction (a3) of che value of the firm's production (PZf(n)).

R - a2(PZf(n)-Wn) + x,PZf(n) We assume 0 c ok < 1 , 0 < a 3 e 1. This arrangement for R broadly reflects the incentive structure established in the RlE '. We simplify and obtain: R - a,PZf(n) - a2Wn, where a, - a+a3.

The Manager's remuneration is expressed as a positive linear function of the production value and a negative linear function of the total wage-bill, Wn, with a linear band between them. We assume that the Planner can impose some penalty on the Manager's remuneration if the Manager pays wages to the Workers above a certain target. To ease the computations we choose a very simple formulation of this tax. We assume that the Planner can change ao independently of ac. In other words, the Planner can increase the deductions based on the wage-bill without increasing the Manager's payment based on the value of the production. Henceforth, we will interpret the 'incentive coefficients' in the following way (a1 >0 , a > 0): a, < _a2_ implies a profit tax and an extra tax on the wage-bill; 3 As explained in section 2 the reforms also allowed the strengthening of the private sector and often gave rise to dual pricing systems. These topics will not be considered in this paper. See Commander and Coricelli (1990) for a theoretical discussion of a dual pricing system in a RlE.

X The workers normally face economic incentives similar to the managers, but the bonus payment constitutes a much smaller part of the workers' overall salary than it does of the mnrnagers' salary.
22 , OI implies that only profit in taxed and _a,_ > aa implies that profit and production value are taxed.

For convenience, the expectation to the price level is taken as constant and hence does not enter explicitly in the Manager's utility function. Finally, we assume that the Manager's utility is directly proportional to the remuneration received. The Manager is risk neutral. We can now write the Manager's utility function, Ut, as: UM - a,PZf(n) - %aWn.

For simplicity, 0 S _a,_ • 1 and 0 S 02 S 1. The Me.aager'c indifference curves are straight lines with the slope (a,/%)(Pf(n)/n).

The Planner's utility function is somewhat modified in relation to the CPE case. We assume that the Planner does not exclusively emphasize a production target and instead concentrates equally on excess demand and the deviation from the production target. The Planner prefers zero excess demand and every deviation from this target decreases the Planner's utility. However, the formula for excess demand (X) is now somewhat different, since the remuneration of the Manager has to be taken into account. Below, the expression in the curled bracket is the Manager's remuneration.

X - Wn + (cgPZf(n)-a2Wn) + PI - PY X - PI - (l-a1)PZE(n) + (l-a2)Wn We use an additive quadratic utility function where the utility decreases quadratically as excess demand or production deviates from 'optimal' values. The Planner's utility function is given by: Up -1B[PI-(l-at)PZf(n)+(l-a2<sup>)Wn]2</sup> - B2[y_y*-.2 The Planner needs an average effort/productivity equal to Z, - Y^m/f(n) to - fulfil the plan. Therefore, if the productivity is Zp and the wage is W (P/n)(Zp,f(n)-I) the Planner attains the maximum utility (equal to zero). This point is called Op. The Planner's indifference curves are elliptical curves around this optimal value and examples are given in figure 4.1.

The Planner still sets the employment n and the price level P. There is no piece-rate system in this economy and hence no Wbm to set. Instead the Planner sets the incentive parameters a, and a2.
<!-- Start of picture text --> 23<br><!-- End of picture text -->

**Figure** 4.1

<!-- Start of picture text --> z<br><!-- End of picture text --> The wage and effort are determined by bar&aining between the Workers and the Manager. We call the Manager's threat point Um and the Workers' threat point **_uw._** e (O s e9 1) denotes the Manager's bargaining power and 1-8 is the Workers' bargaining power. The NZH solution to the bargaining between the Manager and the Workers is: Max ( [UM - UM] [Uw - UW1 ) w,z

[4*.1] If we insert UM - CtPZf(n)-%Wn and Uw u(Z)+v(W) in expression [4.1], we have: Max ( [a,PZf(n)-OaWn - UM]¶[u(Z)+v(W) - U.w] 1 [4.2] w,z Expression [4.2] denotes the NZH solution to the bargaining between the Manager and the Workers as a function of the bargaining power 0.

From the first order conditions for the problem in [4.2] we get the efficiency locus." It can be written as: The interpretation of expression (4.3] is that of a traditional efficiency condition, namely that the marginal rate of substitution (between effort and wage) for the Manager shall equal (minus) the marginal rate of substitution for the Workers. The efficiency locus represents the set of the Nash-Zeuthen-

> " See appendix 3 for the formal derivation of the efficiency locus.
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HarsanyL solutions as e varies between 0 and 1. The slope of the **efficiency** locus proves to be negative (Appendix 3). The intultion is that **if** the Manager has a lot of bargainlng power the solution will be close to the Manager's optimal choice, vlz, high effort and low wage (and hence the solutions will be in the lower, right hand part of the efficlency locus). If the Workers have large bargaining power we will have solutions with low effort and a high wage. The indifference curves for the Manager and the Workers and the efficiency locus, L, are drawn in Figure 4.2.

Figure 4.2 <!-- Start of picture text --> W _u<br><!-- End of picture text --> The actual outcome of the bargaining depends on the bargaining power 0 of the two players. Later we will assume that the Managers and the Workers have the same bargaining power. In this section we will briefly c.nsider what happens to the efficiency locus as the Planner changes some of the exogenous variables. We will examine what happens to the efficiency locus if the Planner changes the incentive structure given to the Managers. Assume that the Manager's penalty on the wage-bill, Wn, is zaised; i.e. q 2 is increased. The Workers' indifference curves are untouched, while the Manager's indifference lines will be flatter. This means that the efficiency locus will move downwards and to the left. In Figure 4.3 the original efficiency locus is called L and the one resulting from an increase in c4 is called L'. That the efficiency locus.will move downward can be verified directly from the expression for the efficiency locus, eq. (4.3]. dW/da2 (given Z) is found in Appendix 3.3 The sign is, as also argued above, negative.

37 This exercise is inspired by McDonald and Solow (1981), p901.
<!-- Start of picture text -->
- 25  -<br><!-- End of picture text -->

**Figure** 4.3

<!-- Start of picture text --> W I<br>Uw<br><!-- End of picture text --> z We now derive the multipliers for the change of the wage as a function<sup>of</sup> changes in the exogenous variables. We assume that the two<sup>players have the same</sup> bargaining power, e - 1. If we insert this in [4.2] and square the expression in the curled bracket, the solution to the bargaining problem can be written as30

# Max ( [a,PZf(n)-%Wn - Um][u(Z)+v(W) - Uw] ) w,z

[4.4] This is the symmetric Nash bargaining solution. Appendix 3 shows<sup>how the first</sup> order conditions yield two equations having to be satisfied<sup>at the same time.</sup> By using the Implicit Function Theorem on the first order conditions<sup>we obtain</sup> a set of two equations for each exogenous variable. This<sup>set can be solved using</sup> Cramer's rule providing the multipliers showing how<sup>each endogenous variable</sup> influences W and Z. We write the Nash bargaining wage (W) as<sup>a function of all</sup> the exogenous variables. Eq. (4.5] provides the basis<sup>for the estimations in</sup> Section 6 of the paper.

Ws - fn(c1, _a2 ,_ P, n, **UM,** Uw) An increase in the incentive parameter for production<sup>(a</sup> 1<sup>) increases the wage.</sup> The reason for this is that to make the Workers produce<sup>more the Manager has to</sup> pay higher wages. An increase in the wage-bill tax (a2) decreases the wage.<sup>If</sup> the price increases, the Manager's remuneration increases, this leading to higher wages in this cooperative game. The sign for employment (n) is undetermined.

X To square the expression does not change the<sup>solutions to this</sup> maximization problem, since X<sup>2</sup> is a monotone transformation when x 2 0.
> - 26 -

If the Manager's threat point, UM, increases the wage will falls, while an increase in the Worker's threat point, Uw, will lead to an increased wage.

We continue this section with some remarks about the Planner. As mentioned above thero is a combination of productivity and wage yielding the Planner maximum utility. This can be attaineA by setting up an appropriate incentive structure for the Manager, i.e. by regulating a,, o,. Appendix 3 contains the calculations for dZ/da, and dZ/da2. One of the multipliers has undetermined sign, but generally the multipliers dZ/da, and dZ/da2 will be linearly independent of dW/da, and dW/da,. This means that we have two goals and two linearly independent instruments and hence the Planner can always obtain the desired productivity and wage just by adjusting _a,_ and a2. Graphically the changes in a, and Ga correspond to changes in the slope and the intercept (on the W-axis) of the Manaser's isoprofit lines. By changing the slope and the intercept of the isoprofit lines the Planner can ensure that the Workers' and the Manager's Nash bargaining solution is just at the Planner's utility maximizing point, Op (see Figure 4.4). Point B denotes the Nash bargaining solution which coincides with Op.

Figure 4.4 <!-- Start of picture text --> Manager's isoprofit line<br><!-- End of picture text --> <!-- Start of picture text --> Workers'<br>indifference<br>curve<br>%Z<br><!-- End of picture text -->

# 4.3 A cooperative game nested in a non-cooperative game

We now establish a three person game for the wage determination. Because three person games are normally difficult to apply since the possibility of coalitions has to be taken into account, we impose some restrictive assumptions. The managers and the workers play a cooperative game, while these two players

> " Note that if soft budget constraints hold and/or the Manager's remuneration is ultimately weakly linked to performance, it might be expected that the Manager's threat point would be very low.
- 27 -

play a non-cooperative game against the government or planner. We will show how nesting the cooperative game in a non-cooperative setting changes the bargaining and leads to some unexpected results.

There are three players in the game, the Manager, the Workers and the Planner. The Manager's and the Workers' utility functions are the same as in Section 4.2. When the Manager and the Workers cooperate we call these two players, the Firm. We use the same quadratic utility function for the Planner as the one described in section 4.2.

The following sequencing of the game is assumed. The Planner calls out a certain wage target and the Manager and the Workers react to this by deciding on a certain effort. The Planner reacts to this announcement of the Firm's effort/productivity by offering another wage. However, this reaction will be taken into account by the Manager and the Workers. The Firms' reaction will again be taken into account by the Planner, and so on. This leads to a noncooperative Nash equilibrium. We assume that the Manager and the Workers maximize the product of their utility gain subject to (the Planner's choice of) W. We assume again that the two players have even bargaining power, e - 1⁄2. The problem for the Firm can be written as:

- - Max ( [a1 PZf(n)-oWn UM][u(Z)+v(W) U.] 1 z

Note that the above problem closely resembles the problem in expression (4.4]. However, in this case we maximize only with respect to Z, assuming that W is given. This means that our solution will be a function relating the Firm's optimal choice of Z to W.' The solution to the problem in (4.6] is found in Appendix 4, The reaction curve is given (implicitly) by equation [4.7].

alPf(n) a,PZf(n)-%aWn - -[(4.7] _____ - u'(Z) u(Z)+v(W) -Uw The interpretation of (4.7] is straightforward. The ratio of the Manager's utility gain to that of the Workers' is equal to (minus) the ratio of the marginal utilities resulting from an increase in productivity.

The reaction curve given by [4.7] is npt the same as the efficiency locu3 found as equation [4.3]. The reason is that the optimization problem required to find the reaction curve is more restricted than the one required to find the efficiency locus. This means on the other hand that the reaction curve will<sup>=</sup> (generally) pass through the tangency point between the Manager's and the Workers' indifference curves. In figure 4.5 the reaction curve is drawn in bold (R) for the same indifference curves as used in figure 4.2. The slope of the Firm's reaction curve is positive (Appendix 4).

1 In all the calculations in section 6 we have assumed that the threat points are exogenous. This can be justified by pointing to the<sup>fact that the</sup> "rules of the game" have determined the formation of coalitions a priori. Hence, the players do not consider other coalitions than the one actually<sup>formed.</sup>
> - 28 -

Figure 4.5 <!-- Start of picture text --> w Firms' reaction curve<br><!-- End of picture text --> The Planner reacts to the Firm's effort/productivitb **y** choosing the utility maximizing wage. To ootain the Planner's reaction curve we must maximize the utility function Up with respect to W. We have: The first order condition for the maximization problem leads after a little simplifycation to eq. [4.9] which also can be written as in eq. (4.10].

PI-(l-a,)PZf(n)+(l-a2)Wn - 0 We see from eq. [4.9] that the Planner's reaction curve simply is a relation between wage and productivity such that excess demand is zero. The reason for this is that given the Firm's choice of effort/productlvity, the only thing the Planner can do ls to try to get as low excess demand as possible, viz; zero excess demand. Further, the Planner's reaction curve can be expressed explicitly and is linear (eq. [4.10]); a consequence of our choice of utility function for the Planner. Finally, the slope of the reaction curve is positive. The number of players is reduced to two, the Firm and the Planner. We find the Nash equilibrium (N) as the intersection of the two players' reaction curves. This is illustrated in figure 4.6. The Flrm's reaction curve is steeper than that of the Planner. Thls is a necessary condition for the stability of the Nash equilibrium.
Figure 4.6 <!-- Start of picture text --> 29 -<br><!-- End of picture text --> Firms' reaction curve Planners' reaction curve In figure 4.7 are the same reaction curves as figure 4.6 but we have also included indifference curves for the Planner and the Firm. The Firm's indifference curves are constructed from the common utility function which is maximized, i.e. the Firm's indifference curves are constructed by setting the content of the curled bracket in expression [4.6] equal to a constant. Further, the Firm has an utility maximizing combination of productivity and the wage; this optimal point is Or. The Planner's optimal point is Op. As figure 4.7 is drawn the Nash equilibrium implies higher wage and productivity than the Firm would prefer and lower wages and productivity than the Planner would prefer. We see that the Nash equilibrium implies solutions providing zero excess demand but a Figure 4.7 <!-- Start of picture text --> Firms' reaction curve<br>r<br>Planners' reaction curve<br><!-- End of picture text -->
- 30 -

very low productivity, i.e. solutions far away from the planned production target. We also notice the non-Pareto optimality resulting from playing the game in a non-cooperative way. The bold curve in figure 4.7 shows the part of the efficiency locus Pareto dominating the Nash equilibrium.

We now derive the multipliers (see Appendix 4). The signs given below are derived without further restrictions on the parameters of the model with the exception of dW/dF where it is assumed that I is not too large.4' fi3 0.) P **aq (0) M 1+) _U O** 1 i: - fn(at, ak, B,, B2, P, n, UM, Uw, I, ZpgAn) [4.11] The multipliers derived from the non-cooperative model are rather surprising and counterintuitive. Comparing with eq. [4.5] we see that, among the common multipliers, only dW/dP has the same sign. The results from the nested game can be interpreted as follows. Let us start with the multiplier dW/dU4 having a negative sign, so that when the Workers' threat point increases the wage will fall. When the Workers threat point increases the bargaining between the Workers and the Manager will lead to lower effort given the wage.' The lower effort/productivity will lead to a lower wage offered by the Planner, this again leads to lower productivity and so on until a new stable Nash equilibrium is reached. Graphically, this process can be described as a movement of the Firm's reaction curve to the left.

Another surprising result is that an increase in the wage-bill tax results in a wage increase, so that dW/da2 is positive. Several effects occur at the same time. The Manager is penalized for wage expenses. Since the latter cannot determine the wage in the bargaining with the Workers the only way the Manager can compensate for this penalty is by increasing the productivity (at the given wage). This corresponds to a shift of the Firm's reaction curve to the right (see figure 4.8). However a change in a% also influences the Planner, since (ceteris paribus) the revenue from the wage-bill tax will increase and hence an excess supply on the goods market is created. The Planner will respond by paying higher wages (at a given productivity level). This corresponds to an upward shift in the Planner's reaction curve. The combined total effect of the movements of the reaction curves implies a new Nash equilibrium with higher wage and higher productivity, N', in figure 4.8. The remaining multipliers can be interpreted in a similar vein.

> 41 (l+a,)Zf(n) > 2I is a sufficient condition for dW/dP to be positive.

I Remember that in this nested bargain the Workers and the Manager can only settle on an effort/productivity given a certain wage. When the Workers' threat point increases they will require an increase in their utility and this is obtained by decreasing their productivity. In effect, the Workers "vote with their feet".
<!-- Start of picture text -->
- 31  -<br><!-- End of picture text -->

**Figure** 4.8

<!-- Start of picture text --> W < / 0 Planners' reaction curvs<br>/ / Firms' reaction curves<br>// e ~~~~~~~~~~~Z<br><!-- End of picture text -->

# 4.4 Summary

The above analysis has allowed us to trace out some of the implications of wage bargaining in the RlE in both cooperative and non-cooperative settings. The cooperative game inhibits a high degree of autonomy for the Planner and gave usual signs for the multipliers. The nesting of the cooperative bargaining in a non-cooperative game is an attempt to capture some of the stylized features of an ecornomy marked by particular ownership, monitoring and information constraints. This leads to a non-Pareto optimal outcome of the game and many of the multipliers have unusual signs. Clearly a number of other crucial characteristics -- such as the presence of a soft budget constraint and its implications, in particular, for the Manager's threat point -- cannot be adequately captured in this type of approach. It should also be noted that for the non-cooperative setting the signs on the exogenous variables are obviously sensitive to the sequence of the game and would be different if, say, the Planner responded with a wage to a productivity given by the Manager and Workers. Finally, it is expression [4.5] taken from the cooperative game that will provide the basis for the later empirical work that we report in Section 6.

# Section 5: Wage determination in the Reform 2 Economy

# 5.1 Introduction

We now present a very preliminary outline of a cooperative game between the Manager and Workers in a context where unemployment is tolerated, where an emerging private sector exists but where most of the enterprises are still state owned. In principle, soft budget constraints are no longer present and the state firm is instructed to act as a profit maximizer. However, it seems reasonable to assume that R2E regimes are characterized by uncertainty over the rule changes
- 32 v

and by features -- including the limited size of the jrivate sector -- that continue to distinguish them from a more conventional market economy. The model elaborated below necessarily simplifies and is based on the standard efficiency bargaining model developed in the context of a capitalist economy 4.

# 5.2 A cooperative game between Manager and Workers

There are two players, the Manager and the Workers. There is one firm directed by the Manager and a given number of Workers (m) seeking employment in the state owned sector. The individual Worker has the utility function defined in section 3.2. Of the m Workers seeking employment in the state sector only n (nrm) are employed. The effort delivered by Workers in the state sector is assumed to be exogenous and equal to Z. **"** The utility for a Worker employed in the state industry is: UW - u(Z) + V(W).

Unemployment amounts to m-n. The utility for an unemployed Worker is: Uw - u(B) + v(O), where B denotes exogenous unemployment benefits. Involuntary unemployment requires that u(Z) + v(W) > u(B) + v(O).

Using a utilitarian formulation of the utility function ^ for the group of Workers seeking employment in the state industry we have: Us - nv(W) + (m-n)v(B) + nu(Z) + (m-n)u(O) The remuneration of the Manager is formulated as in section 4.2. That means that if a, - a2 the state firm actually acts as a profit maximizer, but other choices of a, and a2 will induce other incentives for the Manager. The efficiency locus is found as the first order conditions to the following problem:

- - Max ( [UM UM][Us Us]' ) W,n

(5.1] In the R2E the threat point U8 is the remuneration the Worker can obtain by being employed outside the state industry. (5.1] can be rewritten using the specific 4 McDonald and Solow (1981), Nickell (1982), Ellis and Fender (1985). For an excellent survey, see Oswald (1985).

" Notice, n is now endogenous while the effort Z is exogenous. The explanation for the latter assumption is that the Workers delivering a low effort are laid off in the R2E.

a This way of aggregating utility functions is also used in Oswald (1985) and McDonald and Solow (1981).
- 33 .

utility functions: Max( (a,PZf(n)-a 2 Wn - UM]9[nv(W)+(m-n)v(B)+nu(Z)+(m-n)u(0) - U8]'. **W,n** The efficiency locus is found in Appendix 5. We have: a,PZf (n) -oaW v(W)-v(B)+u(Z)-u(0) Aa v' (W) The interpretation of the efficiency locus is as usual: the Manager's marginal rate of substitution between employment and wage shall equal (minus) the Workers' marginal rate of substitution between employment and wage. Since v(W)-v(B)+u(Z)u(O) > 0 we have that a1PZfI(n)-%aW < 0. This indicates that the Manager employs more labour than would be the case if the Manager was operating in a competitive labour market. As shown in Appendix 5 the slope of the efficiency locus is positive.

Static comparative analysis leads to many undetermined signs. The following sign pattern is derived in Appendix 5.

WI - fn(a,, %a, P, m, B, Z, U., U,) The three determined signs are intuitively sensible. An increase in the labour force and hence in unemployment lowers the wage. An increase in the Manager's threat point also lowers the wage, while an increase in the Workers' threat point has the opposite effect. The remaining multipliers have undetermined signs. With respect to a, an increase might be expected to motivate the Manager to hire more workers and this would increase the wage. Offsetting this would be the fact that the Manager's marginal remuneration as n increases would be negative, motivating a lowering of the wage. It seems feasible to suppose that the former effect will dominate I and this assumption would need to obtain if dir/da, and dW*/dP are to be positive. It is also a sufficient condition for dW/dZ to be positive. As regards dW/da2, an increase in the wage-bill tax a2 would lead the Manager to reduce the wage-bill by lowering the wage. An indirect effect occurs if the Manager reduces employment -- a likely outcome if a tax on total wages is applied -- as this raises the Manager's utility at the margin and hence could increase the wage. The overall effect is indeterminate. For dWC/dB, an increase in unemployment benefits raises the utility pf Workers seeking employment in the state sector. The direct effect is a fall in the wage; the indirect effect is a fall in employment which could lead to a higher wage.

# 5.3 Concluding remarks

The model for an R2E outlined above illustrates the feature that since the ownership of most of the enterprises still belongs to the state it can be expected that the management of these will be carried out following rules from I This means that 2(ajPZf'(n)-a2<sup>W)f'(n)</sup> > a,PZf I(n)f(n). See Appendix 5.
> - 34 _-_

the **_Rlv.._** If these rules stress a high productiont (a, is large) it is likely that a high wage will be the outcome. Unemployment is in this model correlated with the size of the labor force, m, and will tend to lower the wage in the R2E. Finally, if the Workers have good income possibilities in the private sector their threat point will be large leading to upward wage pressure in the state sector.

However, the R2E regime raises a host of other interesting questions which we are unable to address adequately using the above model. Among other issues that need to be tackled will be the differences between the preferences of the union/worker group as bargainer with private employers and as an employer in its own right. The outcomes of that bargaining with respect to the wage and employment are not however obvious, particularly given the overlay of structural change imposed on the system by the transition to an R2E regime.

# SectLmi 6: Some Preliminary Emixical ReIsults

# 6.1 Introduction

We now present in very preliminary form results from estimations of the equation derived from the cooperative game setting for the RlE regime (see Section 4.2). To that end we use quarterly data from both Hungary and Poland covering the periods 1982(1)-1989(2) and 1982(l)-1989(4) respectively 47. Over that time both systems could be stylized as RlE economies. The expression with which we work is repeated below; W+ I (+) M X0 L) - fn(a,, o%, P, n, **Um,** Uw) The parameter, a,, relates to the incentive for enhanced production. A rough approximation for this incentive could be planned or realized productivity. _a2_ covers the wage bill tax. P is producer prices. In section 4 the Workers' and the Manager's expectations to the consumer prices were ignored -- we choose now to include consumer prices in our empirical analysis; n is employment. The manager's threat point UM depends on the manager's alternative income sources (see also section 4.2), and the workers' threat point Uw relates to the workers income possibilities for example in the private sector. For the set-up presented below, however, current data limitations have forced us to drop a number of terms and concentrate in effect on the association between wages, prices and productivity. We also incorporate simple error correction terms in the estimated equations. The following notation is used throughout; 47 Data are taken from the IMF International Financial Statistics and are more fully described in Appendix 6.
° 35 WAGE - index for average earnings. CPI - consumer price index. PPI - producer prices for the industry. INEMP - index for industrial employment. INPDN - index for industrial production. PRO - index for industrial productivity (INEMP/INPDN).

L (as prefix) - natural logarithm of variable. D (as prefix) - first difference of variable. D4 (as prefix) - fourth difference of variable.

ECMH - correction term for Hungary (LWAGE-LCPI). ECMP - correction term for Poland (LWAGE-LPPI-LPRO). DUM<i> - dummy for period i.

# 6.2 Hungary

First difference changes in wages, prices and productivity presented in Figure 6.1 pick out some particular features of the wage and price setting. Wage changes appear clusteree in the first quarter up to and including 1985, therafter an annual wage round appears absent with changes more randomly distributed over the year. Intra-annual wage adjustments appear to have been adopted as an institutional routine associated with the acceleration in consumer prices over the later period. Consumer and producer price changes mostly track each other closely, with some discrepancy at the start of the period. Again, there is a consistent first quarter clustering of price changes. For productivity (measured over the socialist material sector) changes are generally concentrated in the second and fourth quarters. The spike in the fourth quarter can in part be explained by the structure of the wage round and the use of the wage tax to associate the wage and productivity paths. Reported productivity increases in the fourth quarter likely reflect the incentive structure with a tax-based wage policy. In short, there are clear institutional features that yield particula **r** egularities in the movement of the basic variables.

Table 6.1 reports the descriptive statistics. Several features stand out. First, there is effective real wage stability over the period, as indicated by the similarity in the mean of DLWAGE and DLCPI.
- 36 -

PIur 6.1.

Hungary <!-- Start of picture text --> 0.1oo .0 . .<br>oœo~~ ~~ ~~ ~ .... .. A.. .. ..... . j....<br>0 .080 \ .......<br>0.000 ............. ...........<br>-0.025 ''" ' ! ! ; l ~........... . . . .. ....... . ............. . .. ..<br>-0.050<br>1883* 1884 188* Iw6 1987 198S<br>|_DLWA0O<br><!-- End of picture text -->

<!-- Start of picture text --> 0.100.<br>0.075. .... .... .. ...... .... .. .<br>905I... ,, -'.. .. . ,<br>0.025 ..... ...<br>0.000 / . .. .'<br>1983 1i98 19 8-5 98 1gi67 ti988<br>I DICPI DtP7I<br>0.10<br>-0101 ' 1 1985 1988 1987 1968<br>I-DURO|<br><!-- End of picture text -->
- 37

There appears to be an indexation of wages to prices . The correction term ECMH -- a real wage target -- is subsequently adopted in the estimation 1. Consumer and producer prices have an expected coefficient. However, wage and price changes are apparently very weakly correlated. The negative correlatlon between consumer prices and productivity can be explained by the seasonal features alluded to above. The productivity term is also marked by negeative serial correlation, as indicated by the high DW statistic.

Table 6.1

|Sample|range: 198|3(1)- 1989(|2); number|of observati|ons: 26|
|---|---|---|---|---|---|
|Series|<br>Mean|S.D.|Maximum|Minimum|DW|
|DLWAGE|0.0245742|0.0351654|0.1183435|-0.0284606|2.192672|
|DLCPI|0.0235934|0.0251316|0.0966929|-0.0053410|2.513085|
|DLPPI|0.0148701|0.0344912|0.0945788|-0.0419526|2.132274|
|DLPRO|0.0078998|0.0403732|0.076r547|-0.0723430|3.172487|
|||Covariance|<br>Corre|lation||
|DLWAGE|,DLCPI|0.0000035|<br>0.00|41205||
|DLWAGE|,DLPPI|0.0003322|<br>0.28|48057||
|DLWAGE|,DLPRO|0.0004286|<br>0.31|39611||
|DLCPI,|DLPPI|0.0005617|<br>0.67|39663||
|DLCPI,|DLPRO|-0.0002263|<br>-0.23|19340||
|DLPPI,|DLPR0|0.0000690|<br>0.05|15244||

The estimation presented in Table 6.2 relates wage changes to consumer prices, productivity, a one lag correction term and dummies for 1984(4) and 1988(1). The constant is suppressed; its inclusion exerted little effect on the coefficients and their standard errors 1. The size of price and productivity coefficients enter with roughly the same magnitudes as for market economies while the correction term suggests a rapid adjustment speed. There is a clear underlying relationship linking price, productivity and wage changes. However, the equation is clearly under-identified and lacks adequate stability. This can be attributed in part to the institutional features of the economy and the many changes over this period in those arrangements. Nevertheless, a reasonably robust conclusion would be that wage formation has marked endogenous attributes and that the wage does not enter as a purely exogenous variable.

4 More fully explored in Commander and Coricelli (1990).

4 The correction term is an observed relation between wage and price variables during the 1980s and is not to be interpreted as a long run equilibrium relationship.

**_a0_** See Appendix 6 for actual and fitted values as well as residuals.
- 38 -

Table 6.2 Dependent Variable is DLWAGE - Sample range: 1983(1) 1989(2); number of observatiorns: 26

|VARIABLE|COEFFICIE|NT STD.|ERROP<br>T°STAT.|2-TAIL|SIG.|
|---|---|---|---|---|---|
|DLCPI<br>|0.7908919<br>|<br>0.167<br> <br>|3248<br>4.7266867<br>|<br>0.00|0|
|DLPRO<br>|0.3075491<br>|<br>0.123<br> <br>|7486<br>2.4852732<br>|<br>0.02|1|
|ECMH(-l)<br>|-0.6369975<br>|<br>0.141<br> <br>|0623<br>-4.515717<br>|0<br>0.00|0|
|DUM844<br>|-0.0635518<br>|<br>0.025<br>|2779<br>-2.514127|9<br>0.02|0|
|DUM881|-0.0733555|<br>0.029|5827<br>-2.479670|3<br>0.02|2|
|R-squared<br>|<br>|0.603610<br>|<br>Mean of depend<br>|ent var|0.024574|
|Adjusted<br>|R-squared<br>|0.528107<br>|<br>S.D. of depend<br> <br>|ent var<br>|0.035165|
|S.E. of r<br>|egression<br>|0.024157<br>|<br>Sum of squared<br> <br>|resid|0.012254|
|Durbin-Wa<br>|tson stat<br>|1.811326<br>|<br>F-statistic<br>||7.994525|
|Log likel|ihood|62.68714||||

# 6.3 Poland

First difference changes for wage, prices and productivity are reported in Figure 6.2. The pattern of wage change is clear; adjustment is in the first quarter with the exception of 1987(1) 5'. Producer price changes exhibit a similar first quarter pattern with consumer price changes clustered generally in the second quarter. Productivity also exhibits first quarter spikes with a deceleratiou over the last eight quarters of the sample. For both wages and prices, there are sharp accelerations toward the end of the period, particularly from 1989(2) onward as a set of upward adjustments to administered prices occurs and the economy enters into a short high inflation period.

Tne descriptive statistics presented in Table 6.3 indicate a high and predictable correlation between wage and price changes, particularly for producer prices. The mean of wages is somewhat lower than of the cons'tmer prices while the sum of the producer price and productivity variable almost equals the mean for the wage. This motivates the insertion of a correction term relating wages to production values (LUAGE-LPPI-LPRO). It should also be noted that the low DW point to non-stationarity in some variables, particularly consumer prices.

°' There was a significant real wage fall as a result of a price surprise in 1987.
- 39-

FIgue 6.2 Poland <!-- Start of picture text --> 0.4<br>0.4 ...... .... ''''''''' ................ ' ..... ''"''''''''il'''''/ .<br>0.3 ... ...<br>002 .. ..... ... . . .... ... .. .... ............ ............ ......<br>0V.8<br>-0.1<br>1983 1064 IMS 9i8 1987 IS88 1989<br><!-- End of picture text --> <!-- Start of picture text --> 10. 000 .. . ..<br>0.50 ......<br>=045~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~/<br>|_ DICPI .... D .PI<br><!-- End of picture text -->

<!-- Start of picture text --> 0.100<br>0.07'5 . ,. ,.<br>-0-075' ....: ....<br>-0.020<br>19S3 1984 1985 1986 1987 ' 1988 1989<br>|_ DLPRO<br><!-- End of picture text -->
- 40 -

Table 6.3

- Sample range: 1983(1) 1989(4); number of observations: 28

|Series<br>Mean|S.D.|Maximum|Minimum|DW|
|---|---|---|---|---|
|DLWAGE<br>0.1031135|0.1352018|0.4486949|-0.0153958|1.164384|
|DLCPI<br>0.1165299|0.1880734|0.9145840|-0.0054556|0.316326|
|DLPPI<br>0.0870261|0.1242070|0.4987389|0.0000000|1.358728|
|DLPRO<br>0.0108672|0.0280915|0.0927196|-0.0444890|1.724336|
||Covariance|Correlation|||
|DLWAGE,DLCPI|0.0177138|0.7224306|||
|DLWAGE,DLPPI|0.0148153|0.9149054|||
|DLWAGE,DLPRO|0.0009634|0.2630659|||
|DLCPI,DLPPI|0.0169464|0.7523111|||
|DLCPI,DLPRO|-0.0008803|-0.1727925|||
|DLPPI,DLPRO|0.0009282|0.2758756|||

The estimation reported in Table 6.4 relates wage changes to consumer and producer prices, productivity, a dummy being 1 for all quarters of 1987, and the correction term '. The constant is suppressed. The first quarter adjustment structure for the key variables prompts fourth differencing of the data. Unlike for Hungary, both consumer and producer prices enter jointly and significantly and their coefficients sum to near unity. Producer price increases that translate into consumer price increase appear to have direct and full transmission through to the wage. The productivity term has a rather high Table 6.4 Dependent Variable is D4LWAGE - Sample range: 1983(1) 1989(4); number of observations: 28

|VARIABLE|COEFFICI|ENT STD. ERROR|T-STAT.|2-TAIL SIG.|
|---|---|---|---|---|
|D4LCPI|0.374573|8<br>0.1421613|2.6348511|0.015|
|D4LPPI|0.617899|0<br>0.2258889|2.7354108|0.012|
|D4LPRO|0.640817|9<br>0.2495559|2.5678332|0.017|
|ECMP(-4)|-0.859755|1<br>0.2577528|-3.3355802|0.003|
|DUM87|-0.097691|2<br>0.0286817|-3.4060427|0.002|
|R-square|d|0.975054<br>Mean|of dependent|var<br>0.342996|
|Adjusted|R-squared|0.970716<br>S.D.|of dependent|var<br>0.303656|
|S.E. of r|egression|0.051964<br>Sum|of squared re|sid<br>0.062105|
|Durbin-W|atson stat|1.461380<br>F-st|atistic|224.7482|
|log likel|ihood|45.82553|||

' See Appendix 6 for actual and fitted values.
- 41 -

coefficient. While the fit is reasonable for the period 1984-1987, the residuals for 1988/89 suggest inclusion of dummies. Their insertion did not however materially improve the performance of the estimation.

# 6.4 Concluding Comments

Both the Hungary and Poland estimations presented above represent very preliminary attempts at modelling wages in RlE regimes. Data and other limitations mean that the equations are evidently under-identified. The wage variable itself may not capture components of wage income committed to workers under other titles. These factors naturally limit the conclusions that can be derived. Nevertheless, it is clear that in both economies wage changes have been strongly associated with prices and somewhat less with productivity suggesting that wages should not be taken as strictly exogenous. More satisfactory empirical investigation presupposes the construction of new series allowing inclusion of the full set of variables denoted in expression 4.5 above.

# Section 7: onclusion

This paper has addressed the issue of how wages are formed in socialist economies. It has done so on the basis of a number of stylized regimes characterized by their degree of decentralization and introduction of marketbased features or rules. The paper shows that one 'traditional treatment involving a strong assumption of exogeneity for the wage is not warranted. Both the classical planned economy and the partially reformed regime (RlE) are faced with the joint problem of motivating workers in the absence of conventional penalties -- particularly unemployment -- and of monitoring effort. The paper indicates the manner in which these regimes attempt to resolve the incentive problem. For the CPE the piece-rate mechanism is applied. We show how under cooperative and non-cooperative settings the outcome can be either lower than desired productivity or higher than warranted wages. The RlE regime can be interpreted as an attempt to refine the motivational structure by introducing another player, the manager. One underlying objective is to provide a framework where workers and managers engage in a cooperative game to determine wages and output with the incentive structure in effect given by the Planner. We attempt to show how this can yield other-than-intended results if workers and managers cooperate, playing a non-cooperative game with the Planner. This type of outcome might broadly typify recent Polish experience over the 1980s. From the bargaining model that we set up in Section 5.2 we derive an equation that can be estimated for the RlE regime and some preliminary results are reported. The assumption of exogeneity is shown to be untenable, even if institutional and other factors indicate a greater degree of exogeneity than would be the case for a standard market economy.
- 42 -

# Referencea

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Adam, J. (ed.), (1982), Employment policies in the Soviet Union and Eastern Europe; MacMillan Press.

Bauer, T., (1990), The Microeconomics of Inflation uxder Economic Reforms: Enterprises and Their Environment; mimeo.

Calvo, G. and Coricelli, F. (1990), Stagflationary effects of stabilization programs in reforming socialist countries: supply side vs. demand side factors; The World Bank.

Central Statistical Office, Monthly Bulletin of Statistics; Budapest, Hungary.

Charemza, W. and Gronicki, M., (1983), Rational expectations, wage illusion and consumption excess demand: an empirical investigation for Poland; Birkbeck College Discussion Paper, no. 143.

Commander, S. and Coricelli, F., (1990), Levels, rates and sources of inflation in socialist economies: a dynamic framework; The World Bank, mimeo.

Commander, S. and Coricelli, F., (1990) The macroeconomics of price reform in socialist countries: A dynamic framework; The World Bank, mimeo.

Ellis, C.J. and Fender, J., (1985), Wage bargaining in a macroeconomic model with rationing; Quarterly Journal of Economics.

Friedman, J.W., (1986), Game theory with applications to economics; Oxford University Press.

Granick, D., (1987), Job rights in the Soviet Union: their consequences; Cambridge University Press.

Gomulka, S. and Rostowski, J., (1984), The Reformed Polish Economic System, 198283; Soviet Studies, 36,3.

Horvat, B., (1986), The theory of the Worker-Managed Firm revisited; Journal of Comparative Econtales, 10.

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Jones, D., and Svejnar, J.,(eds),(1988), Advances in the Economic Analysis of Participatory and Labour Managed Firms; JAI Press.
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Kirsch L.J., (1972), Soviet wages; changes in structure and administration since 1956; MIT Press.

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Kornai, J.,(1985) Contradictions and Dilemmas; MIT Press, Cambridge.

Marrese, H., (1981), The evolution of wage regulation in Hungary; in Hare, P.G., Radice, H.K., and Swain, N. (eds.), Hungary: a decade of economic reform, George Allen and Unwin.

McDonald, I.M. and Solow, R.M., (1981), Wage bargaining and employment;<sup>The</sup> American Economic Review.

Nickell, S.J., (1982), A bargaining model of the Phillips curve; Discussion paper no. 130, Centre for labour economics, London School of Economics.

Oswald, A.J., (1985), The economic theory of trade unions: an introductory survey; Scandinavian Journal of Economics.

Podkaminer, L., (1988), Disequilibria in Poland's Consumer Markets: Further Evidence on Inter-Market Spillovers; Journal of Comparative economics, 12,1.

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Svejnar, J., (1986), Bargaining power, fear of disagreement, and wage settlements: theory and evidence from US industry; Econometrica.

Tyson, L., (1979), Incentives, income sharing, and institutional innovation<sup>in</sup> the Yoguslav self-managed firm; Journal of Comparative Economics.

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Weitzmann, M., (1970), Soviet post-war economic growth and Capital-Labour Substitution, American Economic Review, 60, 4.
-44-

# AnuendIS 1: The Dictatorial soluation ia She CPE

## Multipliers

To simplify the expression the following notational simplifications are made for Appendix 1 and 2; the stars indicating the optimal value are dropped; Wb **_-_** Wb., and Zp **_-_** Zpw.

The wage **as a** function of the _base_ wage To find dW/dWb we use the Implicit Function Theorem (IFT). Define F as: F - u(Zp)+v(W/P)-u(0)-v(Wb/P) From equation (3.91 In section 3.3 we have that the wage for the Dictatorial - solution is W implying F 0. From IFT, the multiplier dW/dWb is given as: dW dF/dWb - v'(Wb/F^)(l/P) dWb dF/dW V (W/t) ( /r) _dW_ v'(W/P^) - _ > 0 _dWb_ v° (W/r) If we use vw < 0, then v'(Wb/P) > v'(W/P) and hence dW/dWb > 1.

The wage as a function of the planned productivity <!-- Start of picture text --> dW dF/d7Zp uI (Z)<br>_ m - _ -<br>dZp dF/dW vI(W/")(11P)<br>dW u'(ZP)<br>_ . p s > O<br>dZp v' (W/PF)<br><!-- End of picture text --> The wage **as** a function of price expectations <!-- Start of picture text --> dW dF/d^ v'(W/pe)(-W/Po) - v'(Wb/PE)(Wb/e)<br>dPF dF/dW VI Mr)(1/t)<br><!-- End of picture text --> We get after simplification:
- 45 _-_

dW v'(WI/r)(W/P ) - v'(Wb/P )(Wt/P') dr v' _(WMr)_ dW/dr cannot be signed because of two opposite effects as the result of an increase in P. The real value of the whole salary (W) decreases which tends to increase the wage. On the other hand, the real value of the base wage Wb decreases such that the alternative (to deliver zero effort and receive Wb) becomes less attractive. The combined effect is uncertain.

# Th- wage as a function of the Planner's threat point

Up does not appear in F and hence dW/dUp - 0.

# AD1endix 2: The non-cooperative Same

# Slope of the Workers' reaction curve

As argued in section 3.4 the reaction curve can be backward sloping, i.e. the reaction curve constitutes a correspondance and we can not use IFT straight away. However, as a first step we can find the elope of the inverted reaction function. This means we are now going to find dZ/dW (instead of dW/dZ); using the Chain Rule we have: dZ dZ do dW da dW dZ/do can be found from the implicit form of the reaction curve (eq. (3.111 in section 3.4): 1 F - u'(Z) + v9((Wb..+aZ)/PO)(a/P6)

- 0

Using IFT gives us: dZ dF/da v"(W/P*)(ZIPe)(aIPe) + v'(W/PO)(L/P) do dF/dZ u"(Z) + v"(W/P')(a/Pp)2 The denominator is always negative, while the numerator can be positive or negative.

a We generally use the notation F for the function used to derive multipliers via the Implicit Function Theorem. The F used in this appendix has no relationship to the F used in appendix 1.
- 46 -

The piece-rate is a - (W-Wb)/Z. This gives the derivative da/dW - I/Z. We can find the slope of the inverted reaction curve for the Workers.

dZ v"(W/P)(Z/P@)(a/P) + v'(W/P@)(1/1') I Again the denominator is negative, while the numerator can be positive or negative. If the term v"(W/P')(Z/P')(a/P') is smaller than v'(W/P)(1/P) the numerator is positive and dZ/dW is hence positive. If vt(W/P)(Z/P)(air*) > v'(W/PO)(1/P) the inverted reaction curve is downward sloping. Since we have no a priori knowlodge about v" we cannot sign the numerator and hence we cannot determine the slope of the inverted reaction curve. In the figure below an example of a possible reaction curve in an inverted 'effort - wage' space is drawn.

z <!-- Start of picture text --> Workers' reaction curve<br><!-- End of picture text --> <!-- Start of picture text --> Wt..W<br><!-- End of picture text -->

# Multipliers for the Stackelberg equilibrium

We know that the Planner chooses the smallest piece-rate which satisfies equation (3.13] in section 3.4. This means that the Planner will always choose a wage (and effort) on the upward sloping parts of the reaction curve. However, the upward sloping parts on the original reaction curve will also be upward sloping on the inverted reaction curve. This means that only the upward sloping parts of the inverted reaction curve are of interest. As argued above, the inverted reaction curve slopes upward when v"(W/P) (Z/P) (a/PI) < v'(W/P)(l/P). Therefore, when we calculate the Stackelberg equilibrium we know that it is going to be found where v"(W/P')(Z/P@)(a/Pe) < v'(W/P")(1/P).

However, as illustrated above, we can say very little about the behavior of the reaction curve, and by just considering the upward sloping parts of the reaction curve we very easily risk working with overlapping "pieces" of continuous functions. To avoid this we assume that the second order derivative
- 47 -

of v is upward sloping, that is vm > 0. This condition secures that the inverted reaction curve will be bell-shaped, i.e. the original reaction curve will contain only one bend. This again means that the part where v"(W/P)(Z/P`)(v/P`) < v'(W/Pr)(l/Pr) will be a continuous, differentiable, and upward sloping function. The intersection between the Worker's reaction curve and the Planner's Zp, line will then be unique and we can find it just by using IFT (on equation (3.13]).

The wage as a function of the base wage The (total) wage is given as: W - Wb + OZp We have: dW _da_ _ 1 + - z dWb dWb To find da/dWb we use IFT on equation (3.13J. From equation [3.13] we have that the function Fp defined below is equal zero.

F- uI(Z.) + v'((W+aZp)/PI)(a/P) - 0 Using IFT we find the multiplier da/dWb as: _do_ dFp/dWb v"(W/P) _( /P) (alp")_ dWb dFp/da v"(W/P^)(ZM/P)(a/p) **_+_** v'(W/P)(l/r) We insert the expression for da/dWb into the formula for dW/dWb and obtain: dW v' (W/P) (1/P) dWb v" (W/P") (Zp/Pr) (O/P") + v' (W/r) (l/P) Since v" < 0 we have that dW/dWb > 1.

The wage as a function of the planned productivity Again using the Chain Rule: dW do _~ _ Zp _+_ **_a_** dZp dZp
> - 48 -

To find do/dZp we use IFT: do dFp/dZp u" (Zp) + v" (W/P) (/P) (/P*) dZp dFp/dr V"(W/P)(Z4/r)(0/P) + v'(W/r)(l/r) We insert da/dZp into the expression for dW/dZp: <!-- Start of picture text --> dW u"(Zp) + v"(W/r) (C/rP)(a1/)<br>- _ . zp + o<br>dZp v" (W/r) (ZP/r) (alp") + v ' (W/r) (l/r)<br>dW v'(W/r)(q/r) - un(Zp)Zp<br>_ , . . ~~~~~~~> O<br>dZp v"(W/r)(ZP/PO)(o/r) + v'(W/P)(l/P)<br><!-- End of picture text --> The vage as a function of the price ezpectations _dW_ dO dPr dr _da_ dFp/dP v"(W/P)(-W/P)(a/lp) + v'(W/p)(-o/p2) dPr dFp/da v" (W/P) (ZP/P) _(a/p)_ + v (W/P) (l/P) We Insert in formula for dW/dP and get after simplification: dW dFp/dPr v"(W/p*)(_W/Pd)(a/r)Zp + V'(U/p6)(_a/p)Zp dPe dFp/dG v"(W/P1)(Z,/r) _(a/PI)_ + v _(W/P) (1/P^)_ We cannot sign the multiplier dW/dP.

# ApvendiS _3:_ The cooperative game In the RIE

The efficiency locus The NZH solution to the cooperative game is given by: t~i ( [a,PZf(n)-a°Wn - UM]([u(Z)+v(W) - Uw]' For computational ease we take the logarithm of the expression in the curled brackets. We differentiate with respect to W and Z and obtain the following first order conditions:
- 49 -

-a2n v'(W) e + (l-e) - o0 a1PZf(n)-a%Wn - UM U(Z)+V(W) - UW a,pf(n) u'(Z) e **+** (1-e) **-** o a,PZf(n)-%aWn - _UM_ u(Z)+v(W) - UW

By isolating the denominator for the first fraction in the first equation and inserting it into the second equation we get that the efficiency locus can be written as: a, Pf(n) u'M - ~~ **m** - a2 n v'(W)

# Slope of efficiency locus

Let us write the equation for the efficiency locus in a somewhat different way and call the expression on the left hand side F.

F - a,Pf(n)v'(W) + %anu'(Z) - 0 Using IFT we have the following expression: dW dF/dZ %anu"(Z) dZ dP/dW a,Pf(n)v"(W) Since both the second order derivatives are less than zero (cf. section 4.2) we have that _dW/dZ_ c 0.

Change of wage-bill tax dW dF/d%a nu'(Z) d4, J dF/dW a,Pf(n)v"(W) The denominator is, as before, negative; the numerator is negative and the whole expression is negative.

## Multipliers

The first order conditions for the Nash bargaining solution can also be found without taking logs of the utility gain function first. By differentiating the expression in the curled bracket in [4.41 with respect to W and Z we get the following first order conditions:
- 50 -

F. ( t,PZf(n)-% 2 Wn -UM]V(W) - a 2 n(u(Z)+v(W) - _UW]_ - 0 FZ - c,tPZf(n)-a 2<sup>Wn -</sup> M1u'(Z) + c1Pf(n)(u(Z)+v(W) - Uw] - 0 Subscript W respective Z denotes that the objective function is differentiated with respect to W respective Z. Let us call the Manager's gain from the bargaining **6 M, 6 M** - a,PZf(n)-%aWn - UM, and the Workers' gain _6w, 8w_ - u(Z)+v(W) - UW. Using this notation the above system can be written as: Fw

-

6MV'(W) - oan6w ° .0 Fz - SMu'(Z) + al1Pf(n)6w °0 We can find the multipliers via IFT for a set of simultaneous equations. The multipliers dW/dai and dZ/da, can be found from the following syst9mg (dFw/dWIEdW/dcz] + [dFw/dZJ(dZId(xJ - (dFw/da,1 [dFz/dW][dW/da,] + [dFz/dZ][dZ/da1 8 - [dFz/dall The solutions to this system can be found using Cramers Rule: dW [dFw/dZ1[dFz/da1 - (dFz/dZ1fdFw/da,] dai tdFw/dW](dFz/dZ] - (dFw/dZ][dFz/dW] dZ tdFz/dWJ[dFw/daI1 - (dFw/dW3(dFz/da,c de4 [dFw/dW]ldFz/dZ] - (dFw/dZ]ldFz/dWJ Call the common denominator **D3.** From the second order conditions for the maximization problem we know that D3 - (dFw/dW] [dFz/dZ] - (dFw/dZ]<sup>2</sup> > 0 (as well as dFw/dW < 0 and dFz/dZ < 0).

For convenience we calculate the partial derivatives for later use: dFw/dW - -2a2nv'(W) + 6wv"(W) < 0 _dFw/dZ_ - a,Pf(n)v'(W) - a2nu'(Z) - 2C1 Pf(n)v'(W) - - a2nu'(Z)

- (dFw/dZ dFz/dW > 0. The last two equality signs are derived using the condition for the effeciency locus).

dFz/dZ - 2a,Pf(n)u'(Z) + 6Mu"(Z) < 0 Let us first look at the impact of the exogenous variables on the wage.
- 51 - dW/df, - (1/D3)( [dFz/dW][dFw/dXi] - [dFz/dZ][dF/dal]) - (1/D3)( [2c,Pf(n)v'(W)][PZf(n)u'(Z) + Pf(n)6w] - [2a,Pf(n)u'(Z) + 6mu"(Z)J[PZf(n)v'(W)] 4 (1/D3)( 2a,Pf(n)v'(W)u'(Z) - 6mu"(Z)PZf(n)v'(W) ) > 0 dW/da2 - (1/D3)( [dFz/dW][dFw/doa2 - (dFz/dZ][dFz/dQ]1 - (1/D3)( [2c,Pf(n)v'(W)][-Wnu'(Z)l - (2aiPf(n)u'(Z) + 6mu"(Z)J(-Wnv'(W) - n6w] ) - (1/D3)( 2a,Pf(n)u'(Z)n6w + 6mu"(Z)[Wnv'(W) + n6w] ) < 0 dW/dP - (1/D3)( (dFd/dW][dFw/dP] - [dFz/dZ][dFz/dP] ) - (1/D3)( (2a1Pf(n)v'(W)ICa,Zf(n)u'(Z) + a,f(n)6w] - (2a,Pf(n)u'(Z) + 6mu"(Z)]falZf(n)vI(W)] - (1/D3)( 2c,Pf(n)v'(W)a,f(n)6w - 6u"(Z)alZf(n)v'(W) ) > 0

dW/dn - (1/D3)( [dFz/dW][dFw/dnl - [dFddZ][dFz/dn] - (1/D 3) ( [2ctPf(n)v' (W) _j_ [,PZf _'_ (n)u'(Z) + a,PfI(n)6w] - [2a,Pf(n)u'(Z) + 6mu"(Z)][((rlPZf'(n)-q2W)v'(W) _- %6w]_ a (1/Da)( 2a,Pf(n)v'(W)aPf'(n))w + 2acPf(n)u'(Z)oa[Wv (W)+6w3 - 6Mu"(Z)f(alPZf'(n)-oaW)v'(W) - q2<sup>6</sup> w] dW/dn has undetermined sign.

_dW/diUm_ - (1/D,)( [dFz/dW][dFw/dUm] - [dFz/dZ][dFz/dUc] - (1/D3)( (2a,Pf(n)v'(W)][-u'(Z)]

- [2a,Pf(n)u'(Z) + Smu"(Z)J[-v'(W)] )

- (1/D3)( 2a,Pf(n)u'(Z)v'(W) ) < 0.
> - 52 -

dW/dUw - (l/D.)( (dFz/dW][dFw/dUW]- [dFz/dZJfdF/dUw]

- (1/D3 )( (-q2nu'(Z)J[-a1<sup>Pf(n)3</sup>

- [2a,Pf(n)u'(Z) + Smu"(Z)1a[n]1

- (l/D 3)l - anmu" (Z) ) > 0.

We calculate how the o dtLvitx Z depends on the incentive parameters a and _a:_ dZ/dzt - (1/D3 )( [dFz/dW][dFw/dC,J - [dFw/dW][dF2 /dj] I

- (1/D 3 )( 1-qnu1(Z)][PZf(n)v'(W)]

- [-2qanv'(W) + 6wv"(W)I[PZf(n)u'(Z) + Pf(n)6w]

> **-** (1/Do) ( 2a2nv'(W)Pf(n)6w - Jwv"(W)HPZf(n)u'(Z)+Pf(n)6wl 1 dZ/da1 has undetermined sign.

dZ/dM2 - (1/D3)( [dFz/dW] dFw/da]

# - [dFw/dWI[dFz/d42]j

- (1/D3 )( [-q2nu'(Z)j[-Wnvm(W) - n6w]

> - [-2Ganv'(W) + Ewv"(W))[-Wnu'(Z) I

> **-** (1/D3)( a2nu'(Z)n6w + 6wv"(W)Wnu'(Z) ) < 0.

# AaRendix 4: A cooneritive gsAme nested in i non-C or5at1L gft

The **Firm'e** reaction curve If we take logs to the content of the curled bracket in [4.63 and differentiate with respect to Z we get:

-ct,Pf (n) u'SZ) + -0 a,PZf(n)-oWn - u(Z)+v(W) -

This can only be simplified a little; we obtain the reaction curve: a,Pf(n) a,PZf(n)-&aWn - u'(Z) u(Z)+v(W) - Uw The first order condltion for the Flrm can also be written as: FF - C1tPZf(n)-q.Wn - Um1u'(Z) + *,Pf(n)[u(Z)+v(W) - Uw] **-** 0
- 53 -

The second order condition for a maximum requires that dFF/dZ < 0, which is satisfied. To aimplify the notation we call the Manager's utility &ain 6m, _6m_ **-** a,PZf(n)-qWn-Ufm, and the Workers' utility gain<sup>6</sup> w9<sup>8</sup> w **-** u(Z)+v(W)-UW. Fp can then be written as: FF **-MU** '(Z) + -1 Pf(n)6W **-** 0 To find the slope of the Firm's reaction curve we use IFT: dW dFF/dZ a,Pf(n)u;(Z) + 6mu"(Z) + a,Pf(n)u'(Z) dZ dFF/dW -%nu'(Z) + a,Pf(n)v'(W) dW 2a,Pf(n)u'(Z) + 6Mu"(Z) dZ 2nu'(Z) - a,Pf(n)v'(W) Both numerator and denominator are negative, so dW/dZ is positive. The Firm's reaction curve is upward sloping.

# The Planner's reaction curve

We differentiate the content of the curled bracket in expression (4.8] in section 4.3. We obtain:

- Fp -2(1-a,)Bln(PI-(1-',)PZf(n)+(l-%)Wn3

> **0**

This can, provided (1-%)B1n . 0, be simplified to equation 14.9] in section 4.3.

# Multipliers

At the Nash equilibrium both the Firm's and the Planner's reaction curves are satisfied at the same time. (The intersection between the two reaction curves is the NE).

The Firm's and the Planner's reaction curves:

- FF - LMu (Z) + _a,Pf_ (n)6w **_-_** 0

Fp - -2(1-%)Bln[PI-(1-a 1<sup>)PZf(n)+(l-ca)Wn]</sup> **-** 0 We have two simultanous equations. As in Appendix 3 we use IFT and Cramer's rule to obtain the following formula for the multiplier showing the change in W as _a,_ changes.
- 54

# dW [dFF/dZJjdFPz/da, 1 - (dFp/dZ3(dFF/da,1

dal, [dFF/dW][dFp/dZ]

- (dFF/dZl(dFp/dW]

Call the denominator D40 that is, D4 **-** (dFF/dWJ(dFp/dZJ - [dFF/dZjCdFp/dW]. Let us sign this expression. For the NE to be stable (and unique) we require that the slope of the Firm's reaction curve is bigger than the slope of the Planner's reaction curve. The slope of the reaction curves can be found using IFT on the equation for FF and Fp.

Slope (Firm's reaction curve) > Slope (Planner's reaction curve) (dFF/dZ] (dFp/dZ] (dFF/dW] [dPF/dWJ (dFF/dW][dFp/dZ] - dFF/IdZH[dFp/dW] < 0.

The denominator D4 must be negative for the NE to be stable.

For convenience we calculate the partial derivatives for later use: dFF/dZ **-** 2a,Pf(n)u'(Z) + 6Mu"'(Z) c 0 (Firm) dFa/tZ - 2(1-a,)(I-%)B,nPf(n) > 0 (Planner) Let us look at the impact of the exogenous variables on the wage.

dW/dI, - (1/D 4 ){ [dFF/dZ3(dFp/dajj - _(dFp/dZ](dFF/da,l }_

- (1/D 4 ){ t2aPf(n)u'(Z)+&yu'(Z)][-2(1-a2)3,nPZf(n)]

- (2(1-cl)(1-a 2<sup>)B,nPf(n)][PZf(n)u'(Z)+Pf(n)6w]</sup> }

a (1/D4){2(1-a2<sup>)3,nPf(n)}</sup> ( -(1+a,)PZf(n)u'(Z) - Z6Mu"(Z) - (1-a 1)Pf(n)6w _)_ dW/da, cannot be signed.
- 55 -

dW/d4 - (1/D 4)( (dFp/dZ][dFp/dM2] - [dFp/dZ1[dFF/da (1/D4)( (2a,Pf(n)u'(Z)+6mu"(Z)j[2BtnX + 2(1-qg)B,nWn] - [2(1-a1)(1-a)8,nPf(n)][-Wnu'(Z)I )

> - (1/D4)( 2(l-)2)B,n2 W)((lfa1)Pf(n)u'(Z)+5uu"(Z) ) > 0.

- - dW/dB, (1/D4)( [dFF/dZ](dFp/dB,] (dFp/dZ][dFF/dBiJ ) - (1/D4)( [2a,Pf(n)u'(Z)+6muu(Z)][-2(1-a2)nX] ) - 0. Excess demand is always zero.

dW/dI6 is zero since S2 does not occur in neither Fp nor FF.

dW/dP - (1/D4) ( [dFF/dZ][dFp/dP] - [dFp/dZ][dFF/dP] )

- (1/D4)( [2atPf(n)u'(Z)+6mu"(Z)](2(1-4)Bln(Zf(n)-I)] - [2(1-al)(1-a2)8,nPf(n)J[a,Zf(n)u'(Z)4a,f(n)5wI

- (1/D4 )( 2(1-aa)Bln)(2a,Pf(n)u'(Z)(Zf(n)-I)+8mu"(Z)(Zf(n)-I)

- (1-a,)Pf(n)a,Zf(n)u'(Z)-(l-a 1<sup>)Pf(n)a</sup> 1<sup>f(n)6w</sup> ) - (1/D 4)( 2(1-2)B 1 n)( a,Pf(n)u'(Z)[(1+a 1<sup>)Zf(n)-2I]</sup>

+ 6mu"(Z)(Zf(n)-I) - (l-a,)PZ(n)a,f(n)6W] A sufficient condition for dW/dP being positive is that (14*,)Zf(n)-21 > 0.

- dW/dn - (1/D 4 )( [dFF/dZ][dFp/dn] - [dFp/dZ][dFF/dn] )

- (1/D4)( (2a¶Pf(n)u'(Z)+6mu"(Z)][-2(1-2)B¶n(PZf'(n)-(l-a,)W]

- [2(1-ai)(1-a2)B,nPf(n)][(a,PZf'(n)-a4W)u'(Z)+a,Pf(n)Sw1 )

dW/dn has undetermined sign.

- dW/dUm - (l/D 4 )( [dFF/dZ][dFp/dUmj - [dFp/dZ][dFF/dUM )

- (1/D4<sup>)(-[2(1-a,)(l-ak)B,nPf(n)](-u'(Z))</sup> )

- - (1/D4)( 2(l-a,)(l-a2<sup>)BjnPf(n)u'(Z)</sup> ) > 0.
- 56 -

- dW/dUw - (I/D.)( [dFF/dZ1[dFp/dUw] - [dFp/dZ1[dFF/dUw] ° (1/D 4 )( - [2(l-a1<sup>)(l-a2)B,nPf(n)][-alPf(n)]</sup> ) - (1/D 4)( 2(1-aj)(l-a)BjnPf(n)alPf(n) ) < 0.

- dW/dI - (l/D4)( (dFF/dZ][dFp/dIj - [dFp/dZ][dFp/dI] ) - (l/D4)( [2csPf(n)u'(Z)+6uu"(Z)][-2(l-oi)8in(-P)] < 0.

A&Mendix 5: A coooeratLve Same in **the R2F**

# The efficiency locus

The NZH solution is the solution to the following problem: jax(([a,PZf(n)-aaWn - UM]9[nv(W)+(m-n)v(B)+nu(Z)+(m-n)u(0) - UeP) We take logs of the expressions in the curled brackets, differentiate with respect to W and n, and obtain:

**-a2n** nv (W) **e** o + (1-0) _ a1PZf(n)-a2Wn - _Um_ nv(W)+(m-n)v(B)+nu(Z)+(m-n)u(0) - Us

-tjPZf I(n) -a,?W v(W)-v(B)+u(Z)-u(0) e + (1-0) -o a,PZf(n)-a2Wn - U. nv(W)+(m-n)v(B)+nu(Z)+(m-n)u(O) - U8

> C1PZf _'_ (n) -a2W v(W) -v(B)+u(Z) -u(O)

V'(W) The slope of the efficiency locus can be found using IFT if we write the condition for the efficiency locus this way: F - (ajPZf'(n)-a2W)v'(W) + a2(v(W)-v(B)+u(Z)-u(O)) dW dF/dn aQPZf"(n)v'(W) dn dF/dW a2v'(W) + (a,PZf'(n)-a2<sup>W)v"(W)+a</sup> 2<sup>v'(W)</sup>
- 57 -

dW a1PZf"(n)v'(W) _ _ * > 0 dn (t,PZf' (n) -a2W)v"(W) The efficiency locus is upward sloping.

# multipliers

The first order conditions for the Nast. bargaining solution leave two simultaneous equations.

Fwans + 6mnv'(W) - 0 F. (a,PZf'(n)-UW)68 + 6m(v(W)-v(B)+u(Z)-u(0)) - 0 The Manager's gain from the bargaining is _6m_ - aPZf(n)-q2Wn - Um and the Workers' gain is _69_ - nv(W)+(m-n)v(B)+nu(Z)+(m-n)u(0) - Us.

IFT for two simultaneous equations gives the multiplier: dW [dFw/dn][dFA/dCl1 - (dF./dn][dFw/da,] da1 [dFw/dW ([dFn/dn] - [dFw/dn [(dF./dW] The denominator is called D5 and is positive according to the second order conditions.

We calculate the partial derivative needed in all the multipliers.

dFw/dn - - _M8s_ - a2n(v(W)-v(B)+u(Z)-u(0)) + (a,PZf'(n)-o%W)nv'(W) + **6mv'(W)**

- 2n(CtPZf'(n)-%W)v'(W) - - 24n(v(W)-v(B)+u(Z)-u(0))

- dF,/dn a,PZf"(n)69 + 2(a,PZf'(n)-2W)(v(W)-v(B)+u(Z)-u(O))

_ a,PZfn(n)68s - 2(l/%)(a1 PZf'(n)-q2W)2vI(W)

- - 2 a,PZf"(n)69 2o(v(W)-v(B)+u(Z)-u(O))(l/v'(W))

These derivatives have been simplified using the first order condition for the Nash bargaining solution and the condition for the efficiency locus.

- - dW/da, (l/Do)( [dFw/dn][dF./da,] (dFf/dn][dFw/dai]

- (l/D8)( [2n(a1PZf'(n)-q2W)v'(W)] [PZf'(n)66 + PZf(n)(v(W)-v(B)+u(Z)-u(0))]

- [a,PZf-(n)8s v 2(1/a2)(a,PZf'(n)-oW)2v'(W)][PZf(n)nv'(W)]

- (1/Do)( 2n(a,PZf'(n)-%W)v'(W)]PZf'(n)69 - a0PZf"(n)68<sup>PZf(n)nv'(W) )</sup>
- 58 -

(1/Da)( nv'(W)PZ8s)(2(a,PZf'(n)-a2W)f'(n) - a,f"(n)PZf(n) dW/da1 > 0 if 2(a,PZf'(n)-o%W)f'(n) > a,f " (n)PZf(n).

- dW/daa - (1/D5)( [dFw/dn][dFdd4] - [dF./dn][dFw/da]

- (1/D5)( [2n(a1PZf'(n)-%W)v'(W)][-W68<sup>-Wn(v(W)-v(B)+u(Z)-u(O))J</sup>

- a[,PZfn(n)66<sup>-2(1/a,)(a,PZf'(n)-a2W)</sup> 2v'(W)][-n68 - Wnnv'(W)]

- - (1/De)( -2n(a,PZf' (n)-%W)v' (W)W6S + @1PZf"(n)6s[n6s+Wnnv (W)]

- 2(1/2)(ajPZf'(n)-QaW)2vl(W)n68<sup>)</sup>

ajPZf'(n)-aoW > 4W is a sufficient condition for dW/d42 < 0.

- dW/dJJa, - (1/Do) { dFw/dnl[dFn/dUM] - [dFn/dnl[dFw/d(l )

- (I/Da)( [2n(t,PZf'(n)-a2W)v'(W)][-(v(W)-v(B)+u(Z)-u(O))I

- (a [ 1PZf"(n)69 - 2(1/oh)(G1<sup>PZfE(n)-a2W)gv"(W)][-nv'(W)]</sup>

-

- (1/Do) C,PZf"(n)6Snv'(W) < 0

- dW/ZdU - (l/Do) ( (dFw/dnI [ dF./dUg]

- [dF./dn] (dFw/dU8s I

- (1/Da)( (2n(a,PZf' (n)-a2W)v'(WU)] [-(a,PZf' (n)-a2W)] a, (PZf'n(n)66 - 2(1/c,)(t,PZf'(n)-ahW)2v'(W)][-a2n(-1)]

- (l/D5)( -a1a2PZf"(n)n6S ) > 0

- dW/dP - (l/D.) (dFw/dn] [dF./dP] - (dFf/dn dFw/dP] I

- (1/Da)( [2n(a1PZf'(n)-a2<sup>W)v'(W)]</sup> [a,Zf (n)Sg + a,Zf(n) (v(W) -v(B)+u(Z) -u(O))]

- [a,PZf"(n)6s - 2(l/o)(a1PZf'(n) -2V)'v'(W)]fa,Zf(n)nv (W)]

- - (l/Do)( 2n(a1PZf'(n)-a2W)v'(W)]a,Zf'(n)6g - Ck,PZf"(n)6ea,Zf(n)nv (W))

dW/dP > 0 if 2(ajPZf'(n)-a2<sup>W)f'(n)>a,f"(n)PZf(n).</sup>
- 59 -

- dW/dm - (11D5)( (dFw/dnl[dFn/dml - [dF"/dn](dFw/dm] ) - (1/Da)( [2n(a,PZf'(n)-a2<sup>W)v'(W)3[(a,PZf'(n)</sup> + a2W)(v(B)-u(O))J - - 2 [a,PZf"'(n)6s 2(1/a2)(a1PZf'(n)-a2W)v'(W)](-an(v(B)-u(O)I

- - (1/D5){ a1a2PZf''(n)n6S(v(B)-u(O) ) **c** 0.

- dW/dB - (1/D5)( [dFw/dn][dFi/dB] - [dFn/dn]3dFw/dB] _)_

- (l/D.)( [2n(a1PZf'(n)-%aW)v'(W)] ((C1PZf'(n)-a2W)(m-n)v (B) + **6M(-V'** (B))]

- (a1PZf''(n)68<sup>-2(1/a</sup> 2<sup>)(a</sup> 1<sup>PZf'(n)-oW)</sup> 2v'(W)][-a2n(m-n)v'(B)] - (GMD){ -2n(a1PZf'(n)-%aW)v'(W)6Mv'(B) + ,PZf"(n)6Sa2n(m-n)v'(B **)** dW/dB > 0 if 2(a,PZf'(n)-a2W) > (m-n)a1pzf''(n).

- dW/dZ - (1/Do){ (dFw/dn](dF"/dZ3 - CdFn/dn][dFw/dZJ }

- (1/D5){ [2n(a,PZf'(n)-a2<sup>W)v'(W)J</sup> [a,PZf'(n)68 + (a1PZf'(n)-t2<sup>W)nu'(Z)</sup> + a1PZf(n)(v(W)-v(B)+u(Z)-u(O)) + 6uu'(Z)J

- [a,PZf"(n)68<sup>-2(1/a2)(a</sup> 1<sup>PZf'(n)-a</sup> 2<sup>W)V'</sup> v(W)J (-a2nnu'(Z) + a,Pf(n)nv'(W)J )

- - (l/D5){ 2n(a,PZf'(n)-a2<sup>W)v'(W)a,Pf'(n)6</sup> 8 a,PZf"(n)6sa1<sup>PZf(n)nv'(W)</sup> **+** 2n(ca,PZf'(n)-a2<sup>W)v'(W)6Mu'(Z) -a1PZf"(n)6M2nnu'</sup> (Z))

2(a1PZf'(n)-a2W)f'(n) > alf"(n)PZf(n) is a sufficient condition for dW/dZ being positive. If there was no disutility associated by delivering a higher effort u'(Z) would be zero and the stated condition would be a necessary condition.

# **Appendlx** 6t Preliminary empirical results

# Date

The data printed below are from the IMF, International Financial Statistics. The Hungarian data is extracted from the database IMFGES in BESD up to Sept. 1990. The Polish data is from IMFGES and the GUS Bulletin (Statistical Office, Warsaw). The employment index for Poland before 1985 is based on a yearly series from IMF IFS adjusted for seasonal variation using - estimates for the period, 1986(1) 1989(4).
- 60 -

# Legend (for both countries)

WAGE - index for average earnings. CPI **-** consumer price index. PPI m producer prices for the industry. INEMP - index for industrial employment. INPDN - index for industrial production.

Hungary

|obs|WAGE|CPI|PPI|INEMP|INPDN|
|---|---|---|---|---|---|
|1982.1|0.817021|0.781467|0.892857|1.036720|0.950820|
|1982.2|0.818440|0.799846|0.854037|1.038880|0.973588|
|1982.3|0.812766|0.823429|0.847826|1.037800|0.930783|
|1982.4|0.784397|0.828660|0.864130|1.032400|0.962659|
|1983.1|0.837589|0.847112|0.944876|1.008640|0.950820|
|1983.2|0.857447|0.853103|0.906056|1.012960|0.982696|
|1983.3|0.857447|0.866523|0.895186|1.014040|0.950820|
|1983.4|0.837589|0.873712|0.907609|1.018360|0.979053|
|1984.1|0.900709|0.921399|0.977484|1.001080|0.994535|
|1984.2|0.921986|0.931943|0.944876|1.007560|1.004550|
|1984.3|0.909929|0.944884|0.944876|1.011160|0.958106|
|1984.4|0.884397|0.939851|0.943064|1.015120|1.010930|
|1985.1|0.969503|0.987778|1.000000|0.997840|0.997268|
|1985.2|0.999291|0.993769|1.000000|1.002160|1.012750|
|1985.3|0.995745|1.006230|1.000000|1.003240|0.989071|
|1985.4|1.031210|1.012460|1.000000|1.006480|1.000910|
|1986.1|1.046100|1.045770|1.041000|0.993521|0.995446|
|1986.2|1.084400|1.041460|1.029000|0.995680|1.051000|
|1986.3|1.081560|1.055600|1.011000|0.995680|0.989071|
|1986.4|1.082980|1.068060|1.000000|0.998920|1.012750|
|1987.1|1.116310|1.105440|1.043000|0.975162|1.027320|
|1987.2|1.154610|1.126770|1.056000|0.973002|1.075590|
|1987.3|1.178720|1.163670|1.063000|0.967603|1.000000|
|1987.4|1.222700|1.182600|1.063000|C.969762|1.081970|
|1988.1|1.193620|1.302660|1.095000|0.947084|1.036430|
|1988.2|1.230500|1.299540|1.096000|0.943844|1.063750|
|1988.3|1.292200|1.338370|1.109000|0.941685|0.987249|
|1988.4|1.454540|1.361370|1.119000|0.944924|1.057380|
|1989.1|1.451000|1.489190|1.230000|0.918000|1.021000|
|1989.2<br>""|1.486000<br>m^,.<br> <br>.<br>"<br>..|1.530330<br>**mm**|1.272000<br>**mm.__**<br>**..**|0.910000<br>_.,,..._.,.|1.042000<br>**i**<br>**n._**<br>w<br>.|
61 Poland

|**obs**|WAGE|CPI|PPI|INEMP|INPDN|
|---|---|---|---|---|---|
|1982.1|0.543000<br>|0.524000<br>|0.652000<br>|1.021840<br>|0.843000<br>|
|1982.2<br>|0.539000<br>|0.626000<br>|0.652000<br>|1.018810<br>|0.849000<br>|
|1982.3|0.538000|0.650000<br>|0.652000<br>|1.021780<br>|0.838000<br>|
|1982.4|0.575000|0.672000|0.652000<br>|1.022000<br>|0.858000<br>|
|1983.1|0.720000|0.729000|0.752000|1.011840|0.932000|
|1983.2|0.709000|0.785000|0.752000|1.008810|0.922000|
|1983.3|0.701000|0.785000|0.752000|1.011780|0.909000|
|1983.4<br>|0.734000<br>|0.803000<br>|0.752000<br>|1.012000<br>|0.914000<br>|
|1984.1<br>|0.781000<br>|0.845000<br>|0.861000<br>|1.004840<br>|0.971000<br>|
|1984.2<br>|0.793000<br>|0.902000<br>|0.861000<br>|1.001810<br>|0.969000<br>|
|1984.3<br>|0.795000<br>|0.919000<br>|0.861000<br>|1.004780<br>|0.959000<br>|
|1984.4<br>|0.834000<br>|0.914000<br>|0.861000<br>|1.005000<br>|0.964000<br>|
|1985.1|0.913000<br>|0.938000<br>|0.963000<br>|0.999846<br>|0.978000<br>|
|1985.2|0.953000<br>|0.996000<br>|0.969000<br>|0.996810<br>|0.990000<br>|
|1985.3|0.953000|1.017000|0.979000|0.999780|0.986000|
|1985.4|1.000000|1.042000<br>|1.000000<br>|1.000000<br>|1.000000<br>|
|1986.1|1.124000|1.096000|1.126000|1.004000|1.029000|
|1986.2|1.151000|1.164000|1.130000|1.000000|1.044000<br>|
|1986.3|1.150000|1.169000|1.144000|1.000000|1.033000<br>|
|1986.4|1.211000|1.225000|1.178000|1.002000|1.042000<br>|
|1987.1|1.279000|1.301000|1.409000|1.004000|1.054000|
|1987.2|1.378000|1.467000|1.418000|0.999000|1.079000|
|1987.3<br>|1.378000<br>|1.523000<br>|1.439000<br>|0.998000<br>|1.068000<br>|
|1987.4<br>|1.470000<br>|1.591000<br>|1.492000<br>|0.997000<br>|1.075000<br>|
|1988.1|2.147000|1.866000<br>|2.028000|0.990000<br>|1.133000<br>|
|1988.2|2.188000|2.273000<br>|2.142000<br>|0.984000<br>|1.149000<br>|
|1988.3|2.297000|2.458000|2.233000|0.983000|1.130000|
|1988.4|2.704000|2.700000|2.384000|0.981000<br>|1.127000<br>|
|1989.1|4.182000<br>|3.274000<br>|3.432000<br>|0.977000<br>|1.169000<br>|
|1989.2|4.722000<br>|4.204000<br>|3.751000<br>|0.969000<br>|1.159000<br>|
|1989.3|6.587000|7.034000|4.528000|0.972000|1.112000|
|1989.4|10.31700|17.55500|7.456000|0.963000|1.096000|
<!-- Start of picture text --> ~~~~~~0 .................<br>...................... ......... ..<br>0<br>94~~~~~~~~~~~~~~~- - 4.<br>.. -4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.............<br>4J~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~49<br>.4. 1~~~~~~4<br>II<br>II~~~~~~~~~~~~~~~~~II6-444<br><!-- End of picture text -->
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