Welfare Effects of Union Bargaining Centralisation in a Two-Sector Economy

Marcus Dittrich ()

MPRA Paper from University Library of Munich, Germany

Abstract: The paper analyses the welfare effects of union bargaining centralisation in a simple general equilibrium model. A two-sector model is developed where the wage rate in the first sector is either set decentralised by a small union at the firm level or centralised by a large union covering all workers. Worker's outside option is employment in the second sector with wages adjusting to clear the market. The paper shows that social welfare depends on (i) whether the union considers the connection between wages in both sectors, (ii) the structure of the union's objective function, and (iii) the elasticities of labour demand. The welfare maximising employment allocation can be obtained under a high degree of centralisation if the union maximises the total wage-bill. Otherwise, if the union is rent maximising, neither centralised nor decentralised wage setting yield the social optimum. A second best optimum can then be obtained under decentralised bargaining.

Keywords: Unions; Bargaining centralisation; Two-sector economy; Social welfare (search for similar items in EconPapers)
JEL-codes: J61 J51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab
Date: 2006-09, Revised 2006-09
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