Deunionization and job polarization – a macroeconomic model analysis for a small open economy

ABSTRACT

Declining unionization rates and job polarization are two important labor market developments of recent decades. A large body of literature has analyzed these phenomena separately, but little has been done to see whether there is a link between them. We employ a macroeconomic model for a small open economy with a large input–output core to analyze how deunionization may cause job polarization. Our analysis shows that medium-skilled workers are negatively affected by deunionization, mainly as a result of the heterogeneity of the elasticities of substitution between different types of labor. While the elasticities of substitution between high- and medium-skilled labor are relatively low, the elasticities of substitution between medium- and low-skilled are relatively high. As a result, when deunionization leads to increased wage dispersion, we find that demand for low-skilled increases at the expense of medium-skilled labor, thus yielding a more polarized labor market.

KEYWORDS:

• Inequality
• wage differentials
• trade unions and technological change

Acknowledgements

We would like to thank Pål Boug, Ådne Cappelen, Håvard Hungnes and Ingrid Bjartveit Krüger for inspiration and discussions, to Roger Hammersland for technical support in designing an automatic procedure for estimating the system of cost share equations and to Jørgen Ouren for carrying out the calculations. We also benefited from discussions during a presentation at the Annual Meeting of the Norwegian Association of Economists in 2014 and at a workshop with Bruce E. Hansen at Statistics Norway, on October 24, 2014.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 This overview draws heavily upon the model description as outlined in Boug et al. (2013b).

2 For exports of natural resource products such as fish, crude oil and natural gas, gross domestic production is exogenous and exports are determined by Equation 1(1) $X+I=A+\sum _k{d}_{Ck}{C}_k+\sum _r{d}_{Jr}{J}_r+\sum _j{d}_{Mj}{M}_j+DS=A+D,$(1) .

3 Some services have a low rate, and some even have a rate equal to zero, but the standard VAT rate is 25 percent. Excise tax rates (ET) vary considerably across products; fuels, electricity, alcohol, tobacco and nearly all cars are heavily taxed. Most goods and consumer categories are hardly taxed at all, however. Both VAT rates and ET rates are exogenous variables in the model and are not changed in any of the simulations in our study compared to actual historical values.

4 The industry-specific Morishima elasticities are provided in the appendix, Section A.1.

Additional information

Funding

This paper has been financed by the Ministry of Education and Research, Ministry of Health and Care Services, Ministry of Labour and Social Affairs and Ministry of Trade, Industry and Fisheries. We are also grateful for funding provided by the Research Council of Norway (NFR).