'5000 X 5000': Monopoly Unions, Entry Wages, and Sequential Wage Differentiation

Abstract

This paper considers sequential wage differentiation in a monopoly union model of the labour market. In this model the union may set an entry wage in addition to a standard wage for those workers who do not find employment for the standard wage. The union sets the entry wage after the firm has decided about the level of employment for the standard wage. The paper shows how the possibility of wage differentiation influences the employment decision of the firm and the wages demanded by the union. If the union and the firm anticipate the possibility of setting an entry wage, the standard wage is higher and the employment level for the standard wage is lower than in the monopoly union model without wage differentiation. However, the total employment level increases with sequential wage differentiation, and both, the union and the firm, benefit from the possibility of wage differentiation.

Keywords: Trade unions, entry wages

JEL Classification: J31, J51