Why Unions Reduce Wage Inequality - A Theory of Domino Effects

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.<p>