The purpose of this paper is to analyse the impact of the unions' bargaining power on production and wages. In our model a competitive final good is produced from two substitutable intermediate goods. One of them is produced in a unionized unskilled sector and the other in a unionized skilled one. Potential workers decide at their cost to become skilled or remain unskilled and, thus, labor supplies are determined endogenously. We find that in a right-to-manage bargaining framework, the reallocation of the labor supplies due to a change in the unskilled (or skilled) unions' bargaining power may have a positive impact on the final goods production. At the same time, total labor earnings increase with the unskilled unions' bargaining power if the final goods production increases too. We also show that minimum wage legislation is equivalent in its effects to an increase in the bargaining power of the unskilled unions. However, in an efficient bargaining framework, an increase in the unskilled (or skilled) unions' bargaining power has always a negative impact on the final goods production. Copyright 2006, Oxford University Press.
