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

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  • Dittrich, Marcus

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.

Suggested Citation

  • Dittrich, Marcus, 2006. "Welfare Effects of Union Bargaining Centralisation in a Two-Sector Economy," MPRA Paper 11, University Library of Munich, Germany, revised Sep 2006.
    • Handle: RePEc:pra:mprapa:11
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Unions; Bargaining centralisation; Two-sector economy; Social welfare;
    All these keywords.

    JEL classification:

    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - 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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