PAY INEQUALITY

We investigate the effects of wage compression through centralized col lective bargaining when growth depends on the continual reallocation o f labor from older, less productive plants to new, more productive pla nts. We first study the compression of wage differentials that derive from decentralized bargaining in heterogeneous plants. We then conside r wage compression when wage differentials arise from competition amon g employers over workers of differing quality. We show that wage compr ession through centralized bargaining can result in higher profits and greater entry of new plants than either decentralized bargaining or a competitive labor market.