Heterogenous Skills and Monopoly Union: An Application of the Vertical Differentiation Theory

This paper explores the link between vertical differentiation and the modelling of the labour market. We model a particular labour market in a framework directly inspired by vertical differentiation models developed in the field of industrial organization. This attempt is motivated by two facts. First, labour markets are differentiated in several respects (workers’ qualifications, firm’ requirements…). Second, (some) agents on the labour market are strategic players. Consequently we wish to investigate the specific role played by differentiation in situations where wages and market structures result from strategic interaction. As a consequence we show that product differentiation models are a useful tool for analysing the labour market. In our model, firms are differentiated by qualification requirements and can demand either qualified or unqualified labour. Each labour type is represented by its own union. We study the non-cooperative equilibrium that emerges when unions compete in wages to maximize wage-bills. Within this framework, it is shown how differentiation creates as asymmetry between unions that directly affects wages levels and labour market structures. We establish an explicit relation between equilibrium outcomes and the way available qualifications are fitted to firms’ requirements.