The political economy of collective bargaining

We construct a political equilibrium in which employers and unions bargain over labour contracts, workers and capitalists lobby the government for taxation and tabour market regulation and agree ex ante on the type of bargaining. We show that workers and capitalists rule out any bargain over employment, because otherwise the government would capture all the gain. Furthermore, if it is much easier to tax wages than profits, the government protects union power by tabour market regulation. In such a case, the political equilibrium is characterized by strong union power and right-to-manage bargaining, which causes involuntary unemployment. (C) 2003 Elsevier Science B.V. All rights reserved.