Centralised or decentralised unions? Welfare effects of wage aggressiveness

This paper examines the endogenous structure—centralised or decentralised—of labour unions, where leadership is delegated to set wages and holds distinct preferences over wages and employment. To address this issue, the article analyses a duopolistic, quantity-setting industry in which homogeneous firms, producing with a linear cost technology, compete simultaneously (Cournot). The study investigates whether the wage-aggressiveness of union leadership influences the choice of unionisation structure and the welfare of both workers and society. This is done by considering that wages are fixed by the union’s leadership with exogenous preferences, which are more or less oriented towards the salary. Contrary to conventional wisdom, the paper demonstrates that a wide range of wage-aggressiveness levels leads to a Pareto-efficient outcome in the game, yielding a Pareto-superior allocation for society. This arises because wage-aggressiveness renders the decentralised regime more desirable for workers than the centralised one. The analysis is then extended to separately consider heterogeneous firms (different labour productivities) and heterogeneous consumers (different product quality), confirming the results of the baseline model. Additionally, robustness check for convex costs confirms the results found under linear costs. This underscores that technology does not matter in determining the optimal union structure, which is a robust feature of a strategic setting.