Abstract
This paper studies how unionization regimes that differ in the degree of wage setting centralization interplay with the strategic choice of production capacity by firms and how this affects product market outcomes. When labour markets are unionized, firms typically opt for under‐capacity to dampen the unions’ wage claims. This is in contrast with the conventional choice of over‐capacity that applies when labour markets are competitive. Moreover, unless unions are distinctly oriented towards employment, the level of capacity is more efficient under centralized unionization than in a decentralized structure. Relative to more general welfare outcomes, profits are always higher under decentralization, but both consumer surplus and overall welfare can be higher under a centralized structure, depending on the unions’ preference towards wages or employment.
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