Endogenous wage regime selection: A general equilibrium model

This paper analyses the role of transaction costs in the context of incomplete collective bargaining coverage and endogenous wage regime selection. It is often assumed that firms oppose unions because they reduce profits. However, in many countries, union recognition is at the discretion of the employer and at the same time, collective bargaining is one of the main modes of wage-setting. In contrast to the previous literature, I assume that bargaining itself is no longer costless but rather involves additional resources. Based on a simple theoretical model, the results show that different wage regimes, unionized and non-unionized, co-exist in general equilibrium if cost structures between wage regimes are sufficiently different.