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Wage Compression and Welfare in Sweden

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  • Matthew J. Lindquist

    (Stockholm University)

Abstract

This paper calculates the quantitative significance of the welfare effects of wage compression in Sweden. This is done in a dynamic general equilibrium model with overlapping generations where agents choose both schooling (human capital) and assets (physical capital). This paper shows that when labor markets are competitive even low levels of wage compression lead to large welfare losses, since wage compression creates costly unemployment among low-skilled workers. This welfare loss can be significantly reduced (but not eliminated) if firms and unions bargain over efficient labor contracts. In both cases, the effect of wage compression on the supply of skilled labor is rather small, since the disincentive effect of a lower, high-skilled wage is, to a large extent, offset by a lower opportunity cost of schooling due to higher unemployment.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0418.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0418

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Cited by:
  1. Lindquist, Matthew J., 2005. "The welfare costs of union wage compression," European Economic Review, Elsevier, vol. 49(3), pages 639-658, April.
  2. Lindquist, Matthew J., 2005. "Capital-Skill Complementarity and Inequality in Sweden," Working Paper Series 2/2005, Swedish Institute for Social Research.

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