Wage Parity and Patterns of Unionization

This paper is concerned with the microfoundation of union structure. We investigate whether two (groups of) workers within the same firm do better by forming separate unions, or by forming an encompassing union. Our main assumption is that 'wage parity' holds: the firm knows ex ante that it cannot pay different wages to equal workers. Therefore, wage concessions to one group of workers carry over to the other group. We show that in this case, workers will always form the encompassing union. This result is in sharp contrast to the work of Horn & Wolinsky (1988), who investigated the same question yet assumed the possibility of 'wage discrimination': firms may pay different wages to workers. Their main result states that the structure of unionization depends on the qualities of the production function: if workers are complements, they benefit from forming separate unions. If they are substitutes, higher wages are obtained in an encompassing union. Our results deviate from Horn & Wolinsky's (1988) findings as we reject the possibility that the firm pays different wages to equal workers. With 'wage parity', an externality arises that weakens the separate union's bargaining power: if one groups asks for higher wages, the firm can argue that its position in negotiations with the other group would be prejudiced. As a consequence, workers are never worse off by forming the encompassing union.