J51 - Trade Unions: Objectives, Structure, and EffectsReturn

The present paper investigates the use of national wage settings as a mechanism to deter entry via foreign direct investment (FDI) in a unionized monopoly industry. A union which sets centralized wages in a multi-unit firm can both decentralize and change the agenda to prevent the market entry of a non-unionized firm. The adoption of the efficient bargaining agenda is especially effective to deter entry because it lowers the fixed-cost threshold the entrant can bear. Moreover, through side-payments, the incumbent and the union can have common interests in modifying the wage setting to reach outcomes that is Pareto-superior to duopoly. However, if the union cedes "too much power" and becomes "too weak", internal conflicts with the incumbent firm may arise.

The literature on the environment shows that imperfect competition in global markets creates a strategic interaction between governments that can lead to the ineficient distortion of environmental taxes. This literature does not consider that workers can set up different organizational structures to set wages. We assume that under decentralized wage setting there is an independent union in each irm while under centralized wage setting there is an industry-wide union that sets the wages of all irms. We show that under a decentralized structure governments choose environmental taxes closer to those which are socially eficient than those chosen under a centralized structure. However, environmental damage is greater in the former case.