Why Unions Reduce Wage Inequality: A Theory of Domino Effects*

Abstract Numerous empirical studies show that unions reduce wage differences. I demonstrate that their motive might be a mix of fairness and strategy, maximizing the use of union bargaining power in the presence of efficiency wages. Unions can push primarily for raising the lowest wages, and still not sacrifice higher wages much, if the employers themselves increase higher wages to protect efficiency‐enhancing wage differences. If these “domino effects” are strong enough, then an egalitarian wage policy might even increase the median wage.