The Impact of Different Wage Setting Structures under Firm Heterogeneity

The impact of different wage setting structures has been a topic in the literature since the influential study by Calmfors and Driffill (1988). In the present paper, we argue that firmlevel trade unions can establish a wage discrimination if firms differ with respect to their productivity, while sector-level trade unions do not exhibit this phenomenon. Using a Melitz (2003) type model, we can show that, under these circumstances, the unemployment rate in the presence of sector-level trade unions can be lower compared to the unemployment rate under firm-level trade unions. Thus, at least for some parameter constellations, the prominent ‘inverted u-shape hypothesis’ is reversed.