Envy, fairness and political influence in local government wage determination: evidence from Norway

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 government employees 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 union model with internal pay comparisons in Norwegian local governments.