Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Gothenburg, Department of Economics

No 625: Why Unions Reduce Wage Inequality, II: The Relation between Solidarity and Unity

Johan Stennek ()
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Johan Stennek: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O. Box 640, SE 40530 Gothenburg, Sweden

Abstract: This paper demonstrates that the decisions by workers of different skills to unite to form industry unions is closely linked to the egalitarian wage policies that such unions pursue. These results help interpret the stylized facts about unions: that they not only increase wages but also reduce wage inequality. I also demonstrate that political caps on collectively negotiated minimum wages may reduce the wages of all blue-collar workers (cf. “internal devaluation”), but that they may also cause unions to disintegrate in the long run.

Keywords: inequality; wage differences; minimum wages; trade unions; collective negotiations; strategic commitment

JEL-codes: J31; J51

33 pages, September 2015

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