Wage Formation and Minimum Wage Contracts: Theory and Evidence from Danish Panel Data

To a large extent, Danish wage contracts are minimum wage contracts, where the wage of an employed worker consists of a negotiated minimum wage and a personal raise. This paper considers bargaining over minimum wages given that the members of the union have different levels of productivity. We show that the total wage of an individual in this case depends on both individual productivity and standard opportunity costs of the union. Further, it is shown that ceteris paribus the minimum wage is lower in this economy than the (total) wage in an economy where all workers have the same productivity. Finally, it is shown that increasing progressivity of the tax system does not necessarily imply a reduction in the minimum wage. A log-linearized version of the wage equation is estimated for 6 major unions using a panel which is a sub-sample of a representative 5 per cent sample of the Danish population. Estimated parameters of the marginal tax are negative for most male workers whereas this is not the case for women. Even for male workers the coefficients are much smaller than in previous studies based on macro data.