Institute for Research on Labor and Employment

The paper studies the relationship between wage dispersion and centralization. We distinguish between two sources of wage differentials: Heterogenous -workers with different skills and firms with varying levels of economic rent per employee. The corresponding dimensions of centralization, i.e. coordination across skills or across firms and industries, are studied separately. The analysis shows that centralization may produce both lower and higher skills differentials, depending on the relative factor shares of the different types of workers. Inter-firm or -industry wage differentials among workers of identical productive characteristics, on the other hand, is always reduced with a higher degree of centralization. With a high- and a low-wage sector, the central union tends to gain from the shift in employment associated with a narrowing of the wage gap since more workers are employed in the high-wage sector.