RAISING WAGES TO DETER ENTRY INTO UNIONIZED MARKETS*

Shingo Ishiguro and Laixun Zhao

The Japanese Economic Review, 2009, vol. 60, issue 4, 435-445

Abstract: This paper investigates entry under a unionized oligopoly when entry and wage negotiations are sequential. We find the incumbent has incentives to raise the wage, which strengthens the bargaining position of the union relative to the entrant at subsequent negotiations and thus discourages entry. We show that entry is more likely to be deterred (accommodated) if the union is wage (employment) oriented and that raising unemployment compensation during recession not only reduces the burden of the unemployed but also induces new entry, creating more employment opportunities. However, during a business boom, reducing unemployment compensation is a better policy.

Date: 2009
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