Edited By Rasim Yilmaz, Günther Löschnigg, Hasan Arslan and Mehmet Ali Icbay
The Impact of Privatisation on Earnings in Transition Countries
Standard arguments of privatisation regarding wages point out that under public ownership, workers earn high wages and benefits due to unionisation and soft budget constraints. As such, before privatisation, public corporation managers supported by soft budgets were not provided with incentives to minimise costs. Besides, public unions were in a total monopoly bargaining position. Thus, they were able to get excessive pay levels and benefits for their members by using their power on politicians and during bargaining. After privatisation, the aim of the new owners facing hard budgets was to maximise profits; therefore, they had a greater incentive to minimise costs. Besides, privatisation reduces workers bargaining power and therefore union wage premiums. Thus, effective new owners are able to raise productivity and lower costs by reducing wages and over-staffing.
However, the effect of privatisation on wages is theoretically ambiguous. Wages may either rise or fall as a result of privatisation depending on the firms’ level of output, market power of firms, union’s role, and the nature of wage determination in the market (Monterio, 2003).
New private owners faced with stronger profit-related incentives, harder budget constraints, and constant output may reduce costs by reducing wages. On the other hand, if the privatised firm’s output rises in response to an increase in the firm’s market share and the total quantity demanded for the industry, as well as the skills of new management regarding marketing, innovation, and entering new markets, new private owners may...