Relative wage struggles during the interwar period, general equilibrium and the rise of the Swedish model

Abstract

Abstract I analyze the origins of two central features of the Swedish labor market: wage bargaining centralization and wage equalization. I focus on the campaign for wage equalization by workers in the traded goods sector during the interwar period which resulted in a change in the statutes ofthe Swedish Trade Union Federation (LO) in 1941 with more powers to LO. The workers in the traded goods sector suffered a wage decline relative to the non-traded goods sector in the early 1920s which lasted the interwar period. They argued that they paid the higher wages in the non-traded goods sector through higher prices for non-traded goods. A two-sector general equilibrium model is used to evaluate this claim which is found to be robust. Centralization and wage equalization may thus be explained by self-interest rather than ideology or envy. The high wage in the non-traded sector can be seen as creating a negative externality on other groups. Wage equalization through centralization arose as an institutional resp...