Collective Wage Agreements on Fixed Wages and Piece Rates May Cartelize Product Markets

Labor law limits the freedom of individual firms and agents to deviate from the clauses prescribed by collective wage agreements. We show that employers' associations and unions may exploit this legal framework to stabilize product market cartels. This new view on the institution of collective wage agreements provides an interesting insight for strategic management: A self-commitment on the labor market may greatly improve the product market situation. Moreover, it has an important implication for economic policy: Competition authorities should observe collective wage agreements for their potentially collusive effect on product markets.