On the Formation of Wages and Wealth: Unions, Staffing, and the Power of Identity
How do industry-wide wage negotiations interact with firm-level wage setting? Why do firms rent workers from staffing agencies instead of hire them directly? How can raising a minimum wage actually lower wages in some cases? And what explains the unusual financial behavior of wealthy entrepreneurs? These are a few of the puzzles tackled in a newly published doctoral thesis by IIES graduate student Agneta Berge, who brings fresh theoretical tools to bear on how wages are set, how workers are hired, and how identity shapes economic behavior.
The double-edged sword of collective bargaining
In many countries, unions and firms bargain wages through a combination of industry-wide and firm-level negotiations. Agneta proposes a new framework for studying this two-tier wage bargaining system and finds that it can behave in surprising ways.
In a frictional and monopsonistic labor market, where firms and workers don’t instantly find each other and where workers’ labor supply responds positively to wages, the effects of a centrally negotiated wage floor are not straightforward. When the wage floor is high, it acts as the going wage in local talks, and increasing it predictably raises pay. But when the wage floor is low, both firms and workers locally prefer a higher wage to ensure sufficient labor supply, and (quite surprisingly) increasing the wage floor can reduce wages. Why? Because the higher wage floor improves the firm's bargaining power by securing more labor supply. Firms, knowing that more workers will choose to stay at the higher wage floor, feel less pressure to raise wages in local negotiations. As a consequence, and unexpectedly, the central union may push for low wage floors to exploit firms’ vulnerability, while the employer association prefers high wage floors to keep the wage bill down.
These findings demonstrate that wage floors can be used as a strategic instrument to influence local negotiations and that centralizing wage negotiations may act as a moderating force on wage growth. In the end, the optimal level of the wage floor depends on the specifics of the labor market and the structure of bargaining - a powerful reminder that labor policy can't be a one-size-fits-all.
Do staffing agencies lower wages? Yes, but there's a catch
Another puzzle explored in the thesis is the rise of staffing agencies. Why do so many firms choose to rent workers rather than hire them directly?
Agneta and co-authors show in a theoretical model that when firms face decreasing returns to labor (the more people they hire, the less additional value each new worker brings) staffing agencies can actually reduce both wages and employment. In-house workers have more bargaining power because they can credibly threaten to quit. But with staffers, that power vanishes. Firms prefer this arrangement because it keeps labor costs in check.
As a consequence, and quite strikingly, in a labor market where firms can freely choose between hiring and renting workers, Berge finds that firms always opt for staffing agencies.
Why entrepreneurs hold on too tight
The final chapter of the thesis shifts focus from the relations between firms and workers to the ownership of firms and its importance for top wealth accumulation, proposing a novel concept: identity capital. Agneta and co-authors suggest that, for many entrepreneurs, building a business isn't just about profits, it becomes a core part of who they are. They formalize such a psychological trait in an economic model and find that identity can deeply affect financial decisions.
Entrepreneurs with high identity capital may avoid downsizing their businesses even when it would be the rational financial move - because selling off their "life project" feels like a personal loss. Conversely, even when opportunities arise to expand, they may hesitate, fearing the identity strain of overextending.
This helps explain why some wealthy entrepreneurs save so much and invest in riskier portfolios than standard economic theory would predict. Their financial decisions aren’t just about returns, they’re about preserving a self-image tied to their firms.
Rethinking labor markets and top wealth
Taken together, Agneta's thesis offers a rich and nuanced picture of modern labor markets and of economic decision making, where power, psychology, and institutional design matter. Her work takes one step toward bridging the gap between economic models and real-world wage setting and saving behavior, and provides a clearer map of the forces shaping work and wealth in the 21st century.
For policymakers, economists, and curious workers alike, her insights are a reminder that the workplace is more than a marketplace, it's a place where structure, strategy, and identity all matter.
Agneta successfully defended her thesis “On the Formation of Wages and Wealth” on 11 June. Axel Gottfries from the University of Edinburgh, kindly acted as opponent.
Agneta will next join Uppsala University for a 4-year Post Doc.
Click here to read the thesis in full.
Last updated: June 11, 2025
Source: Institute for International Economic Studies (IIES)