Trade Unions and the Minimum Wage

Why do labor unions and left/labor parties support the statutory minimum wage in some countries, such as the United States, but oppose it in others, such as Denmark or Sweden? This paper presents a formal model of trade union preferences for the statutory minimum wage. On the one hand, the minimum wage can raise above-minimum negotiated wages by increasing the union’s fallback position and increasing the labor costs of nonunion competitor firms. On the other hand, the minimum wage presents certain dangers: it may (1) set wages higher or lower than unions prefer, (2) reduce the incentives of workers to join unions in the short term, and (3) undermine the social custom that sustains union membership in the long term. For these reasons, we predict that unions and left/labor parties will support a statutory minimum wage only when unions are too weak — when unions bargain with a smaller share of firms, when they are legally restricted from engaging in certain strike actions, and wage bargaining is less coordinated — to sustain high wages on their own. Empirically, we document a robust, cross-national correlation between several of the key variables in our model and the type of minimum wage setting institution and illustrate the model’s mechanisms using case studies of union preferences in the US, UK, Germany, and Sweden and party preferences in the UK and Germany.