UNION WAGE COMPRESSION AND SKILL ACQUISITION

Abstract

ABSTRACT In this paper, I examine the relationship between unionisation and total output in an economy with a dual labour market, heterogeneous agents, and human capital investment. My primary focus is the skill acquisition channel, through which unionization affects total output. I theoretically demonstrate that the skill premium, and thus human capital investment, is determined by the prevalence of unions in high‐ or low‐skill‐intensive sectors. In particular, if a low (high)‐skill sector is unionised, then the skill premium is higher (lower), ensuring a larger (smaller) high‐skill sector, irrespective of the unions bargaining power. To test this hypothesis, I also empirically investigate the effects of unionisation on total productivity. The results indicate that through the reallocation of labour, unionisation induces an expansion of high‐skill‐intensive sectors, while low‐skill‐intensive sectors contract.