DP1724 | Unemployment and the 'Labour-Management Conspiracy'

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Management and a union bargain sequentially, first choosing a contract which will later determine the level of employment, and those choosing a wage. The government then chooses an output subsidy, after which the industry chooses employment according to the contract. The presence of a natural turnover rate in the unionized sector creates unemployment whenever the union wage exceeds the competitive wage. Government intervention can increase both the equilibrium amount of unemployment and worsen the intersectoral allocation of labour. Intervention can also reverse the relation between the equilibrium amount of unemployment and the flexibility of the labour market. Government intervention is especially damaging when labour markets are inflexible. Unemployment weakens, but does not eliminate, the possibility of a ?labour-management conspiracy?.