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

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Dittrich, Marcus

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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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11.

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Date of creation: Sep 2006
Date of revision: Sep 2006
Handle: RePEc:pra:mprapa:11

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Related research
Keywords: Unions Bargaining centralisation Two-sector economy Social welfare

Other versions of this item:

Find related papers by JEL classification:
J61 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Geographic Labor Mobility; Immigrant Workers
J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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  1. Pekka Sinko, 2004. "Subsidizing versus Experience Rating of Unemployment Insurance in Unionized Labor Markets," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(2), pages 186-, August.
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    Other versions:
  4. Kiander, Jaakko, 1993. "Endogenous unemployment insurance in a monopoly union model when job search matters," Journal of Public Economics, Elsevier, vol. 52(1), pages 101-115, August. [Downloadable!] (restricted)
  5. Hoel, Michael, 1991. "Union Wage Policy: The Importance of Labour Mobility and the Degree of Centralization," Economica, London School of Economics and Political Science, vol. 58(230), pages 139-53, May. [Downloadable!] (restricted)
  6. Juha Kilponen & Pekka Sinko, 2005. "Taxation And Centralised Wage Setting: The Case Of Endogenous Labour Supply," Scottish Journal of Political Economy, Scottish Economic Society, vol. 52(4), pages 587-606, 09. [Downloadable!] (restricted)
  7. Rosen, Sherwin, 1970. "Unionism and the Occupational Wage Structure in the United States," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(2), pages 269-86, June. [Downloadable!] (restricted)
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  11. Hoel, Michael, 1990. " Local versus Central Wage Bargaining with Endogenous Investments," Scandinavian Journal of Economics, Blackwell Publishing, vol. 92(3), pages 453-69.
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  13. Rodseth, Asbjorn, 1993. "Efficiency Wages and Local versus Central Bargaining," Oxford Economic Papers, Oxford University Press, vol. 45(3), pages 470-81, July. [Downloadable!] (restricted)
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  14. Hoel, Michael, 1989. "Efficiency wages and local versus central wage bargaining," Economics Letters, Elsevier, vol. 30(2), pages 175-179, August. [Downloadable!] (restricted)
  15. Oswald, Andrew J, 1979. "Wage Determination in an Economy with Many Trade Unions," Oxford Economic Papers, Oxford University Press, vol. 31(3), pages 369-85, November. [Downloadable!] (restricted)
  16. Holmlund, Bertil & Lundborg, Per, 1999. "Wage bargaining, union membership, and the organization of unemployment insurance," Labour Economics, Elsevier, vol. 6(3), pages 397-415, September. [Downloadable!] (restricted)
    Other versions:
  17. Hieser, R O, 1970. "Wage Determination with Bilateral Monopoly in the Labour Market: A Theoretical Treatment," The Economic Record, The Economic Society of Australia, vol. 46(113), pages 55-72, March.
  18. Johnston, J, 1972. "A Model of Wage Determination under Bilateral Monopoly," Economic Journal, Royal Economic Society, vol. 82(327), pages 837-52, September. [Downloadable!] (restricted)
  19. Barth, Erling & Zweimuller, Josef, 1995. " Relative Wages under Decentralized and Corporatist Bargaining Systems," Scandinavian Journal of Economics, Blackwell Publishing, vol. 97(3), pages 369-84, September.
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