On Relative Pay and Union Egalitarianism

Working Papers 121 Kiander Jaakko and Niemeläinen Heikki

In this paper our aim is to develop a model of trade union behavior in which the reference group´s wage is included into the trade union´s objective function. The determination of equilibrium wages is then studied under different assumption. The main results of the analysis are as follows: equal wages for differenct groups is not a Pareto efficient solution, although partial wage equalization can be shown to be good for employment. Given the preferences, cooperative solution is shown to yield more wage compression that noncoperative solution or union rivalry. Particularly important for the employment record is the solidarity of high wage group while the solidarity (or envy) of the low wage group is harmful to employment.