Wage Flexibility in a Unionized Economy with Stable Wage Dispersion

The paper estimates how wages respond to changes in regional unemployment using detailed Swedish micro data.

By Mikael Carlsson, Iida Häkkinen Skans and Oskar Nordström Skans

The study is set in an economy with close to complete union coverage where real wages have grown continuously in all parts of the wage distribution for 15 years, and where the aggregate wage dispersion has remained constant for the same period.

Our results show that this aggregate stability is coupled with non-trivial flexibility in terms of wage adjustments to changes in regional unemployment. These results are particularly strong after the data have been purged from compositional fluctuations. However, we also document that the industries with least flexible collective agreements cover a higher-than-average share of workers with a high risk of job-loss into unemployment. This institutional feature leads to additional wage rigidities for vulnerable workers.