Solidaristic wage policy

Solidaristic wage policy refers to the practice, noticeably carried out in Sweden during the 1950s, of limiting wages in the most profitable sectors and increasing wages in less profitable sectors. It was carried out in order to achieve more equal wages on a national basis. It also had the consequence of heightening economic competitiveness through transferring capital from lower value-added companies and sectors to higher ones.

2019.02.18 | John Logue

Wage policies in the 1950s led to greater wage equality.

The solidaristic wage policy was implemented by Nordic trade unions to raise the wages of the poorest paid workers relative to the best paid. Acting on the proposals of their leading economists, Gustav Rehn and Rudolf Meidner, the Swedish Trade Union Confederation (Landsorganisationen (LO)) began the process in the 1950s. The centralised structure of collective bargaining at the time and the high rate of unionisation made it achievable. The result was systematically to push up wages for the unskilled and for women relative to skilled male workers. This led to greater wage equality in the Nordic region than elsewhere in Europe, especially in the period from the 1960s to the 1980s. Wage differentials –the difference between high and low paid employees – still today remain far smaller than in the United States or the United Kingdom.

The solidaristic wage policy led to wage restraint among workers in the most capital-intensive, profitable and internationally competitive sectors, while pushing up wages in the less competitive sectors. This created a windfall profit (or 'unutilised wage margin') in the most profitable companies relative to what the results would have been with company-by-company bargaining, and, by imposing higher wage costs, reduced the profitability of labour-intensive, otherwise low-wage companies. The consequence was to redeploy capital from lower value-added companies and sectors to higher value-added companies and sectors. This, in turn, led to the redeployment of labour from lower value-added to higher value-added work. The existence of generous systems of unemployment compensation and retraining support helped to make workers more comfortable with this process of industrial renewal.

The windfall profit created by workers’ wage restraint was the reason for the wage earner fund proposals in the early 1970s. These called for recapturing a portion of the company profits for workers through collective pools. It should be noted, however, that workers also recaptured a portion of what otherwise would have been the employers’ windfall through wage drift (demand-driven wage increases) and plant-specific agreements between contracts. In Denmark in particular, wage drift in 1970s was driven by wildcat strikes, especially in the skilled trades.

The push for a more decentralised system of collective bargaining since the end of the 1980s has stopped - but not reversed - the movement toward increased wage equality. Moreover, further wage compression today meets resistance from skilled workers. Wage differentials began to widen after 1990 in response to global, European and domestic political and economic changes, but they are still relatively modest compared to most advanced industrial countries. While wage solidarity remains a goal for the unions, the greater use of sectoral bargaining since the late 1980s (i.e., bargaining framework contracts for broad industrial sectors) has provided greater range for wage dispersion.

The overall impact of the solidaristic wage policy has been to reduce wage inequality within national labour markets with regard to both skills and gender. In terms of economic competitiveness, it has made the most competitive Nordic firms even more competitive in the global economy while further undermining the competitiveness of the least competitive firms, often forcing them out of business. As a result, it has served as a tool of economic modernisation and competitiveness in the global economy. 

Further reading:

Eric S. Einhorn and John Logue, Modern Welfare States: Scandinavian Politics and Policy in the Global Age (Westport: Praeger Publishers, 2003)

Audun Farbrot, 'A culture of smaller wage differences', Science Nordic (November 2011), sciencenordic.com/culture-smaller-wage-differences

Lawrence M. Kahn, 'Wage Compression and the Gender Pay Gap', IZA World of Labor (April 2015), www.wol.iza.org/uploads/articles/150/pdfs/wage-compression-and-gender-pay-gap.pdf