"The paper analyses the welfare effects of union bargaining (de)centralization in a dual labour market with a unionized and a competitive sector. We show that social welfare depends on both the structure of the union's objective function and the elasticities of labour demand in both sectors. The welfare-maximizing employment allocation can be obtained under a high degree of centralization if the union maximizes the total wage-bill. Otherwise, if the union is rent maximizing, welfare is higher under local bargaining. However, in that case neither central nor local wage setting yields the social optimum."

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