Imperfect goods and labor markets, and the union wage gap

Existing theoretical literature fails to explain satisfactorily the differences between the pay of workers who are covered by collective agreements and others who are not. This study aims at providing a model framework that is amenable to an analysis of this issue. Our general-equilibrium approach integrates a dual labor market and a two-sector product market. The results suggest that the so-called “union wage gap” is largely determined by the degree of centralization of the bargains and, to a somewhat lesser extent, by the expenditure share of the unionized sector's goods.