| Abstract: | This paper analyses wage formation in a unionized economy where consumers as an externality in their utility function have the level of local pollution. If modelled in a microeconomically consistent way this externality should also be present in the preferences of the trade union. The key result is that when this trade‐off between pollution and employment is included in the trade unions’ preferences then they are willing to lower wages to generate substitution towards higher employment and lower pollution. As a consequence, an increase in the pollution tax will lead to lower wages. At a more general level the results show that in models analyzing pollution issues, such as the double dividend literature, it is very important for the policy conclusions how trade unions are introduced. |
