Wage-setting institutions as industrial policy

Centralized wage-setting arrangements compress wage differentials along many dimensions, but how do they affect employment structure? To address this issue, we relate the evolution of US-Swedish differences in the industry distribution of employment to relative wages between and within industries. We find that centralized wage setting shifted Swedish employment away from industries with high wage dispersion among workers, a high mean wage and, especially, a low mean wage. The dissolution of Sweden's centralized wage-setting beginning in 1983 led to widening wage differentials and a reversal in the evolution of US-Swedish differences in industry structure. © 2004 Elsevier B.V. All rights reserved.