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Wage Compression and Welfare in Sweden

  • Lindquist, Matthew J.

    ()

    (Dept. of Economics, Stockholm University)

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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File URL: http://www2.ne.su.se/paper/wp00_04.pdf
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Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2000:4.

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Length: 46 pages
Date of creation: 20 Jan 2000
Date of revision:
Handle: RePEc:hhs:sunrpe:2000_0004
Contact details of provider: Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
Phone: +46 8 16 20 00
Fax: +46 8 16 14 25
Web page: http://www.ne.su.se/
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