The paper analyses the welfare effects of union bargaining (de)centralization in a dual labour market with a unionized and a competitive sector. We show that social welfare depends on both the structure of the union's objective function and the elasticities of labour demand in both sectors. The welfare-maximizing employment allocation can be obtained under a high degree of centralization if the union maximizes the total wage-bill. Otherwise, if the union is rent maximizing, welfare is higher under local bargaining. However, in that case neither central nor local wage setting yields the social optimum. Copyright 2010 CEIS, Fondazione Giacomo Brodolini and Blackwell Publishing Ltd.