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| Author: | Lindquist, M.J. |
| Title: | The welfare costs of union wage compression |
| Journal: | European Economic Review
2005 : APR, VOL. 49:3, p. 639-658 |
| Index terms: | Labour markets Pay Minimum wage Unemployment Welfare Models |
| Language: | eng |
| Abstract: | This paper calculates the quantitative significance of the welfare (hereafter as: w-f.) costs of union wage compression (here as: w-cmpr). This is done in a dynamic general equilibrium model with overlapping generations where agents choose both schooling (human capital) and assets (physical capital). The labour market in this model is characterized as a right-to-manage contract allowing unions to compress wage differentials btw. high- and low-skilled workers, by implementing a binding minimum wage. This paper shows that when labour markets are competitive even low levels of w-cmpr. lead to large w-f. losses, since w-cmpr. creates costly unemployment among low-skilled workers. The effect of w-cmpr. on the supply of skilled labour, however, is rather small, since the disincentive effect of a lower, high-skilled wage is offset by a lower opportunity cost of schooling due to higher unemployment. |
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