When is there more employment, with individual or collective wage setting?

Abstract

With the standard Diamond-Mortensen-Pissarides labor market with frictions we analyze when there is more employment with individual wage setting compared to collective wage setting, using a wage equation generated by the standard total surplus sharing rule. Using a Cobb-Douglas production function we findnd that if the bargaining power of the individual is high compared to the bargaining power of the union there is more unemployment with individual wage setting and the opposite is also true. When the individual worker and the union have the same bargaining power, if the cost of open a vacancy is high enough, there is more unemployment with individual wage setting. Finally, for a constant marginal product of labor production function AL, when the individual worker and the union have the same bargaining power, individual bargaining produces more unemployment.