Insiders and outsiders in labour market models

The monopoly union model and the wage bargaining model are analysed in light of the distinction between insiders and outsiders. It is shown that a possible outcome of the wage bargaining is the wage level where all insiders keep their job, but no outsiders are taken on. In this situation, small variations in the bargaining situation of the union will not affect the wage and employment outcome. Furthermore, it may even be the case that the union does not wish a higher wage, because this would lead to lay-offs among the insiders. Thus, the monopoly union model and the bargaining model may yield the same wage and employment levels.This paper is part of the research project Wage Formation and Unemployment at SAF Center for Applied Research at the Department of Economics, University of Oslo. Comments from Michael Hoel, Andrew Oswald, Åsa Rosén, Asbjørn Rødseth and an anonymous referee on earlier drafts are gratefully acknowledged.