Two-stage bargaining with coverage extension in a dual labour market
This paper studies two-stage bargaining in a simple general equilibrium model with a dual labour market. We analyse the case where agreements reached at the central level in the union sector extend beyond this sector. Conditions are identified under which firms and unions have a commonality of interest in extending coverage of a minimum wage to the non-union sector of the economy. In many countries, labour markets comprise a primary sector with high non-market clearing wages and job queues, and a secondary sector with market clearing. The latter arises endogenously in our model: it is optimal for the union sector to impose a market clearing wage on the non-union sector. This suggests that coverage extension can increase welfare.
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