Does unionization reduce wage inequality? New evidence from business dynamism

Incorporating the business-dynamism effect, this paper examines distribution and welfare effects of labor unions. An increase in unionization can raise the unskilled wage rate and lower the skilled wage rate in the economy, and wage inequality can be further reduced by the business-dynamism effect of firm exit. Nonetheless, the inequality-reducing role might be mitigated by the delay of firm exit caused by labor unions. In addition, the rise in unionization can solve the problem of excessive entry in the oligopolistic market, thereby improving welfare of the economy. Using multiple-country panel data, we find a negative relationship between unionization and wage inequality. This finding confirms the theoretical prediction of the inequality-reducing effect of labor unions.