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Department of Economics, School of Business, Economics and Law, University of Gothenburg Working Papers in Economics

No 539:
Why Unions Reduce Wage Inequality, I - A Theory of Domino Effects

Johan Stennek ()

Abstract: Numerous empirical studies show that unions reduce wage differences. But surprisingly few attempts have been made to understand why. Swedish unions reveal that the reason is both ideological and strategic. Relying on employers to voluntarily increase higher wages, to protect efficiency-enhancing wage-differences, unions can focus on increasing the lowest wages without sacrificing higher wages. Since all workers gain, egalitarian wage policies promote unity among workers with different productivity. I formalize these ideas and draw implications for the current debate on capping collectively negotiated minimum wages in Europe. The model combines wage bargaining, efficiency wages, internal union politics and coalition formation.

Keywords: inequality; wage differences; minimum wages; trade unions; collective negotiations; strategic commitment; (follow links to similar papers)

JEL-Codes: J31; J51; (follow links to similar papers)

51 pages, September 2012, Revised June 2015

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