Wage formation in a unionized economy

Sammanfattning: Around 85 percent of all blue-collar workers in Sweden are organized in an all-encompassing union, Landsorganisationen (LO). During the last decade, this fact has given rise to quite lively research on centralized wage formation. This dissertation addresses three main questions: How are wages determined by a Central Trade Union CTU which organizes workers of different skills? How are wage levels and relative wages affected when workers’ relative income positions matter? How can an egalitarian wage policy be pursued and implemented so that workers experince a Pareto improvement? The results show that as compared to rivalrous unions, a CTU would set lower wages when workers are (gross) complements or when workers are substantially concerned about their relative wage. Moreover, wage dispersion would increase due to envy if workers’ alternative wages are equal, while wage dispersion would decrease if the relation between the alternative wages is the same as the relation between their competitive wages. An egalitarian wage policy is sustainable if workers’ alternative wages are represented by their competitive wages. However, when alternative wages are represented by unemployment benefits, comprised of a proportion of the workers’ competitive wages, the welfare of the CTU is improved if a "pseudo-egalitarian" wage policy is implemented. Then skilled workers are granted a market-clearing wage through wage drift and there is no incentive for them to exit from the CTU.