Wage formation under union threat effects: Theory and empirical evidence

Abstract

Trade union activity may have an impact on wages outside the bargaining sector through threat effects. In this paper, a model of wage formation with endogenous bargaining structure is developed. We show that in firms with low union density, no local collective bargaining arises and the wage outcome equals the reservation wage. For higher density levels, the union threat is effective and the wage level is higher than the reservation wage even if there is no collective bargaining at the firm level. An empirical specification of the model is derived and fitted to establishment-level data for the Italian metal-mechanical engineering industry. Empirical results suggest the presence of endogenous selectivity in the choice of the bargaining regime, and confirm the existence, according to local union density, of different wage determination patterns. Threat effects are shown to be particularly relevant for establishments with an intermediate level of union density.