Trade unions and regional development

We focus on the role that labour unions play in the context of a two-region dual economy. We show that (unskilled) unions will increase the wage of unskilled workers and depress growth in both the backward and the advanced regions. The growth effects will be felt more strongly in the relatively poor region. If skilled workers are allowed to migrate and unions recognize that a more aggressive wage-setting policy may foster migration, unions will moderate their wage requests. However, regional unions would then have a strong incentive to coordinate their wage demands across regions. This would further raise the unskilled wage, and more so in the backward region. We conclude that labour market policies designed to foster regional convergence should seek both to discourage centralized wage-setting and favour (skilled) labour mobility.