Multi-Levels Bargaining and Efficiency in Search Economies

In this note, we extend the traditional search and matching framework to take account of the different levels at which negotiations may take place. We show that, in the absence of any distortion, sector-level bargaining ought to be less efficient than bargaining taking place at the other levels. This type of inefficiency leaves room for labor market policies. We show that a well designed combination of employment protection, hiring subsidy and payroll tax is able to restore efficiency. In addition, this result suggests that the relationship between the labor market performance and the level at which bargaining takes place is conditional on labor market institutions.