Wage Compression and Welfare in Sweden

Matthew Lindquist

No 2000:4, Research Papers in Economics from Stockholm University, Department of Economics

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.

Keywords: Choice of schooling; quantitative macroeconomics; unemployment; university premium; wage compression; welfare (search for similar items in EconPapers)
JEL-codes: D58 E24 E25 J24 J31 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2000-01-20
New Economics Papers: this item is included in nep-dge and nep-lab
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Citations: View citations in EconPapers (3)

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Working Paper: Wage Compression and Welfare in Sweden (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:sunrpe:2000_0004

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