This paper extends the Diamond (1980) model with labor unions to study optimal income taxation and to analyze whether … unions can be desirable for income redistribution. Unions bargain with firms over wages in each sector and firms unilaterally … determine employment. Unions raise the efficiency costs of income redistribution, because unemployment benefits and income taxes …

Trade unions tend to reduce the dispersion of wages among their members. Skilled workers may therefore have an … theoretical model to gain insight into the determinants of the number of trade unions at a firm. We show that imperfect …