Unions - the Bigger, the Worse? Centralization and the Scope of Bargaining

This paper studies welfare effects of union bargaining (de-) centralization in a two-sector economy. We present a model with union membership dynamics where the wage in the first sector is the result of either decentralized bargaining at the firm level or centralized bargaining at the sector level. The workers’ outside option is employment in the second sector, where wages adjust to clear the labor market. We show that the scope of bargaining has a decisive role in the discussion on the impact of bargaining decentralization on social welfare. Our results imply that decentralization increases welfare if unions and firms bargain over both wage and employment. Contrary, if only the wage is bargained over, centralization is welfare-increasing. Comparative static examinations complement our analysis.