Abstract: | Noting the trend toward more independent trade unions in developingcountries, this article examines whether the presence of unionsstrengthens or weakens the benefits to be gained from economicpolicy reform. We show that the presence of "passive" unionsonesthat choose their wage-employment contract given the firm'scost-minimizing strategyincreases the welfare gains fromtrade liberalization, because trade reform lowers the wage premiumenjoyed by the unionized sector, reducing a distortion in thelabor market. These gains are amplified when the unions are"active", namely, when they negotiate a contract with the firmthat is off its labor demand curve. Such a contract resultsin featherbeddingpaying workers more than their marginalproductand trade reform reduces the amount of featherbedding.The policy implication for Bangladesha country with strongtrade unions and a protected unionized sectoris thatthe benefits of further trade liberalization may be greaterthan otherwise predicted. In Indonesia, where both unionizationand import tariffs are low, allowing greater independence tounions may preserve flexibility and reward workers better thanthe current minimum-wage policy. |