How far does unions' power reach? A political economy model of the labor market and empirical evidence for Europe

The paper first aims at showing that wages and salaries tend to follow a log-normal distribution in Europe, regardless of time and country. The authors then set up a political economy model of the labor market where unions offer their (old and new) affiliates combinations of the average wage level and the standard deviation of salaries.  Globalization and other forces, however, have recently made it more and more difficult for the unions to maintain or elevate average real wages while controlling for the respective standard deviation. This is shown empirically for selected European countries, where data allow us to infer from changes in real wages and the standard deviation of wages and salaries the degree of affiliation unions were able to achieve in the recent past.

Objectives: This paper sets up an equilibrium concept for the interest of unions to fulfill the wishes of their affiliates: higher average wages going along with a limited standard deviation of wages and salaries. In this vein, we test empirically how the performance of unions in this respect has resulted in changing degrees of affiliation for a sample of European countries.

Data/Methods: This paper is theoretical in the first part and empirical in the second, making use of standard tools of political economy models and statistical/econometric analysis.

Results: This paper shows that (i) earlier findings on the log-normal distribution of personal incomes can be transferred to the distribution of wages and salaries. (ii) The forces of globalization and other factors have dampened the development of average real wages while increasing their standard deviation; (iii) this is the main explanation for the setback of European unions in the last two decades.