Trade Unions and the Efficiency of the Natural Rate of Unemployment
Decentralized wage setting in search equilibrium models is inefficient because the meeting firm and worker ignore the dependence of job-matching probabilities on the number of firms and worker engaged in search. This paper investigates whether risk-neutral monopolistic unions will have an incentive to internalize this externality. The author finds that the externality will be internalized only if the union's policy is chosen by unemployed persons. If employed persons influence union policy, both the union wage and unemployment will be too high. A tax on the union wage, combined with an employment subsidy to firms, can correct this inefficiency. Copyright 1986 by University of Chicago Press.
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