Union wage demands with footloose firms and agglomeration forces

Abstract

This paper considers the wage demand of a sector-level monopoly union facing internationally mobile firms. A simple two-country economic geography model describes how firms relocate in response to international differences in production costs and market size. In contrast to standard models, the union fully takes into account the international mobility of firms. If international differences in labour productivity and market size are small, lower foreign wages or lower trade costs necessarily lead to lower union wage demands. Otherwise, lower foreign wages or trade costs may reduce the sensitivity of the remaining firms in the home country to wage changes, leading to higher union wage demands.