Centralized wage setting arrangements compress wage differentials along many dimensions, but how do they affect employment structure? To address this issue, we relate the evolution of U.S.-Swedish differences in the industry distribution of employment to relative wages between and within industries. We find that centralized wage setting shifted Swedish employment away from industries with high wage dispersion among workers, a high mean wage and, especially, a low mean wage. The dissolution of Sweden’s centralized wage-setting beginning in 1983 led to widening wage differentials and a reversal in the evolution of U.S.-Swedish differences in industry structure.
Second on his “list of eleven things that … we do know” about how institutions affect outcomes, Freeman (1998) states that “Institutions Reduce the Dispersion of Earnings.” He points to collective bargaining, centralized wage setting, minimum wage laws and progressive taxation as important in this regard. He also cites a variety of studies that provide evidence of a major role for such institutions in compressing wage differentials. Blau and Kahn (1999) sound similar notes in their extensive survey of research on labor market institutions.
Evidence that institutions help shape the wage structure leads directly to other questions about their role in determining outcomes. We pursue one such question: How do labor market institutions that compress wage differentials affect the industry distribution of employment? The logic behind this question is straightforward: If relative wages influence the allocation of workers and cooperating factors of production, then institutional forces that compress wage differentials also affect the structure of employment.
To address the question, we examine the evolution of Sweden’s industry distribution of employment from 1960 to 1994 and compare it to the U.S. distribution over the same period. Specifically, we relate the evolution of U.S.-Swedish differences in the industry distribution to the structure of relative wages between and within industries. We find that centralized wage setting alters the industry structure of employment in three directions: away from low-wage industries, away from high-wage industries and away from industries with high wage dispersion among workers. These effects intensified as centralized wage-spreading spread through the Swedish economy, and they reversed after the dissolution of centralized wage setting. The effects are large, at their peak accounting for 40 percent of U.S.-Swedish differences in industry structure. They also account for much of the evolution in the U.S.-Swedish differences between 1970 and 1994.
Three sets of remarks motivate our analysis and comparative treatment of the Swedish experience. First, collective bargaining dominates the wage-setting process in Sweden. 88
percent of Swedish employees belonged to a labor union in 1980, as compared to only 20 percent of U.S. workers in 1983. National differences in wage-setting institutions are even more pronounced than suggested by the union membership figures. From 1956 to 1982, the wage formation process in Sweden was dominated by centralized negotiations between the major employer confederation, SAF, and the largest labor organization, LO. LO advocated and vigorously pursued a “solidarity” wage policy aimed at compressing wage differentials and promoting the restructuring of the Swedish economy away from low-wage sectors. Beginning in the mid 1960s, centralized negotiations also came to play a major role in the wage formation process for most white-collar workers and many professional workers.
Second, Swedish wage-setting institutions were a major determinant of relative wage outcomes. As is well known, Sweden has a compressed wage distribution compared to other advanced economies, especially the United States. There is compelling evidence that Swedish wage-setting institutions brought about a remarkably and increasingly compressed wage distribution between the early 1960s and early 1980s. Moreover, the partial breakdown of Sweden’s centralized wage-bargaining regime in 1983, followed by a complete collapse over the next few years, initiated an expansion in wage differentials along many dimensions. The U.S. experience, in contrast, exhibits flat or rising overall wage inequality after the late 1960s, including dramatic and sustained increases in wage inequality beginning around 1980. Thus the Swedish experience offers an attractive laboratory for investigating how institutions that compress wage differentials influence the structure of employment. The U.S. economy, which is characterized by a much smaller role for collective bargaining, in general, and for centralized wage setting, in particular, provides a useful benchmark against which to evaluate the Swedish experience.
Third, there is much to explain in the way of U.S.-Swedish differences in the industry employment distribution and in the evolution of these differences over time. Based on a detailed concordance between the U.S. and Swedish industrial classification systems that we constructed for this study, we find a modest narrowing of the gap between the employment distributions in the two countries from 1960 to 1970, considerable divergence between 1970 and the middle 1980s, and a sharp narrowing of the distance after the mid 1980s.
Some previous work investigates the effects of Swedish wage-setting institutions on the industry distribution of employment. Edin and Topel (1997) show that employment grew more rapidly from 1960 to 1970 and from 1970 to 1990 in Swedish industries that had (a) higher initial wages and (b) more rapid wage growth. Davis and Henrekson (1997, 1999) show that the industry distribution of employment in Sweden tilts away from low-wage towards high-wage and, especially, medium-wage industries relative to the U.S. distribution as of the mid 1980s. Both studies support the view that wage compression promoted the restructuring of the Swedish economy away from low-wage industries.
Our study differs from and improves upon earlier work in two important respects: First, our data set covers a longer time period, contains more frequent observations, and uses finer industry classifications outside the manufacturing sector. Better data enable us to more closely relate wage structure variables and wage-setting institutions to the timing and nature of U.S.-Swedish differences in the employment distribution. We pursue a difference-in-difference style of investigation in much of this study, whereas Edin-Topel mainly examined differences over time within Sweden and our earlier work mainly examined between-country differences at a point in time. Second, we consider how within-industry wage dispersion relates to the employment distribution, whereas earlier work considers only the role of industry-level mean wages relative to the overall mean wage.
The paper proceeds as follows. Section 2 describes Swedish wage-setting institutions and relative wage outcomes. The discussion motivates several hypotheses about the impact of wage-setting institutions on the industry distribution of employment. Section 2 also identifies other policies and developments that reinforced the effects of wage-setting institutions or facilitated a compression of wage differentials. Section 3 describes the evolution of U.S.-Swedish differences in the industry distribution of employment and documents how they relate to industry-level measures of worker schooling intensity, mean wages and wage dispersion. Section 4 investigates several hypotheses about the role of wage structure variables in accounting for U.S.-Swedish differences in the industry distribution of employment and their evolution over time. Section 5 summarizes the empirical findings and discusses some of their implications.
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