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Imperfect goods and labor markets, and the union wage gap


Existing theoretical literature fails to explain satisfactorily the differences between the pay of workers who are covered by collective agreements and others who are not. This study aims at providing a model framework that is amenable to an analysis of this issue. Our general-equilibrium approach integrates a dual labor market and a two-sector product market. The results suggest that the so-called “union wage gap” is largely determined by the degree of centralization of the bargains and, to a somewhat lesser extent, by the expenditure share of the unionized sector's goods.

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Fig. 1


  1. Blanchflower and Bryson (2003) use more recent data and adjust for bias due to earnings imputations (see Hirsch and Schumacher 2004). Their results suggest that the union wage gap has declined from 22.4% in 1984 to 15.1% in 2001 (private sector).

  2. For a more general formulation, see Blanchard and Giavazzi (2003, p. 881).

  3. If workers were distributed unevenly, some of them could increase the probability of an employment by reallocating themselves to a firm where less workers are attached.

  4. Since all agents fare better in the case of an agreement, this second term serves only as the “conflict point” during the bargain, but is never realized.

  5. As noted earlier, wages, demand, labor input, and so forth are the same for all firms in a symmetric equilibrium. Nevertheless, the bargaining parties consider these variables to depend on the result of the bargain if they are related to them, and as exogenous if they are related to other firms/workers.

  6. Unfortunately, the definition and measurement of bargaining coverage are not unambiguous. One difference between the reported coverage rates is that some of them adjust for the fact that, in several countries, not all workers have the legal right to bargain. From the role of the parameter in the model, it is clear that we must take the unadjusted coverage rate. Therefore, the OECD data were only viable for those countries where all workers have the right to bargain, so that both rates coincide. For instance, this is the case in Italy.

  7. The 1994 value has to be taken from 1993, which is the last one published.

  8. To avoid computational problems, a value of 0.0001 rather than literally zero is the minimum (employed for USA and Canada).

  9. This source converts the national data such that they approximate US concepts. The Danish values stem from OECD (2001, p. 20f).

  10. These values are comparable with those of Elbehri and Hertel (1999).

  11. I would like to thank one anonymous referee for making this point.


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The first draft of this paper has been prepared during a visit to the Universitá degli Studi di Modena e Reggio Emilia. I thank the entire Economics Department (in particular Graziella Bertocchi, Marina Murat, and Sergio Paba) for the hospitality I received. I would also like to thank Christian Dustmann, Chiara Strozzi, and two anonymous referees for their comments.

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Correspondence to Helge Sanner.

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Communicated by Christian Dustmann.

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Sanner, H. Imperfect goods and labor markets, and the union wage gap. J Popul Econ 19, 119–136 (2006).

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  • Wage differentials
  • Dual labor market
  • Monopolistic competition

JEL Classification

  • D58
  • J31
  • J51