Economia

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Envy, Fairness and Political Influence in Local Government Wage Determination: Evidence from Norway Author(s): Bjarne Strøm Reviewed work(s): Source: Economica, New Series, Vol. 62, No. 247 (Aug., 1995), pp. 389-409 Published by: Wiley on behalf of The London School of Economics and Political Science and TheSuntory and Toyota International Centres for Economics and Related Disciplines Stable URL: http://www.jstor.org/stable/2554874 . Accessed: 10/01/2013 22:43
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Economica (1995)

62, 389-409

Envy, Fairnessand Political Influencein Local GovernmentWage Determination: Evidencefrom Norway
By BJARNE STR0M
University ofTrondheim,Norw,ay Final version received 5 January 1994. The main question in this paper is: Do wages of low-skilled workers in Norwegian local governments adjust to clear the labour market for such workers, or are the wages affected by trade unions comparing their wages with other wages inside the local governments? The main empirical findings are as follows. First, wages of low-skilled local governmentemployees respond not to wages in the external labour market, but to wages of higher skilled and higher paid workers inside the local government. Second, wages are positively associated with the share of socialist politicians in the local council. These results are interpreted as support for a uniion model with internal pay comparisons in Norwegian local governments.

INTRODUCTION

The purposeof this paper is to analyse empirically the forces driving the local adjustments of wages in local governments, and three main questions are considered: (1) Do wages of low-skilled local government employees respond to wages of skilled workers in the same locality? (2) Do municipal wages respond to indicators of regional labour market pressure such as regional unemployment and private sectorwages? (3) Are wages in local governments affected by the political composition of the local council? To answer these questions, I consider a simple theoretical framework where local governments are supposed to maximize the production of services given their budget constraint. Two models of wage determination are contrasted. The first is a conventional market model where wages equilibrate demand andsupply of labour. The second is a union model where the wage outcome for low skilled workers depends on the employer's bargaining power, on wages and unemployment in the regional labour market and on wages of skilled workers in the local government representingenvy effects. Both common observation and newspaper discussion suggest that fairness and envy are important issues in the actual operation oflabour markets. This paper provides econometric evidence from Norwegian local governments consistent with the hypothesis that wage relativities matter. The expansion of the public sector has been a prominent feature of the postwar period, especially in the Scandinavian countries. Despite this, little is known about wage formation in the sector. Research on wage formation has been concentrated...