Labor market institutions and the second-best tariff

Labor market distortions provide a second-best case for protection. However, the implications are less obvious when the product market is imperfectly competitive too, as suggested by several partial equilibrium studies. This paper adopts a general equilibrium approach, combining unionization in labor markets with monopolistic competition in product markets. Two labor market settings are considered: fully centralized wage bargaining (''Scandinavia'', for short) and negotiation at the firm level (''Latin America'). The competitive labor market case is used as a benchmark. It is shown that in Latin America the second-best tariff is higher, and the welfare level lower, than in the benchmark case. Scandinavia reaches the first best under free trade.