Agglomeration and wage bargaining

Abstract

This paper examines the role of trade union and the type of wage bargainings in economic geography model. In our setting, wage bargaining is held between immobile workers and mobile entrepreneurs who decide the location of their firm. It is shown that stronger trade unions in both regions would put a stronger pressure toward agglomeration of firms. This is due to the fact that the stronger bargaining power of trade union makes home market effect larger. Under core-periphery distribution of firms, this effect can act the role as anchorage of firms. Stronger trade unions in home region can keep the firms remain in their region. Moreover, we extend to several employment environments, which are the outside option of workers. We show that differences in bargaining structures and employment environments could affect the stability of symmetrically distributed firms, namely symmetry break point. We show that while unemployment rate acts as a centripetal force, not only the degree of bargaining power of trade union but also unemployment benefit can play as a centrifugal force. A key message of the paper is that generous unemployment benefit and higher trade union make the distribution of firms more uneven and sustainable.