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How do financial markets affect industrial relations: an institutional complementarity approach

This article presents a simple formal model of institutional complementarity (IC) applied to industrial relations, and develops two important aspects of IC. We first develop a formal definition for the static and dynamic aspects of IC and then relate these to the interaction between financial relations and the outcome of a wage bargaining between firms and trade unions. Trade unions and firms have the choice between a cooperative negotiation targeting at the long-term success of the firm and a conflictual relation targeting at maximizing the current share. One important determinant in this game will be the time horizon financial investors have as they influence the realization of future gains of cooperation between workers and firms. When financial investors are patient, a pareto-superior cooperative equilibrium can be attained. On the other hand, whenever one of the two bargaining parties gets too weak, the viability even of the long-term equilibrium is threatened.