Optimal Degree of Regulation in a Unionised Economy

The aim of this paper is to analyse to which extent a deregulation policy in the labour and product markets leads to an improvement in the utility of all the parties (firms and unions). To do that, we build a model where firms hire workers in a unionised labour market and sell their products in a market ruled by monopolistic competition. The parties bargain over real wages according to a Right to Manage rule. The solution of the bargaining problem allows us to determine the real wages and through them we can obtain the equilibrium level of employment and the consequent utilities for the union and the firms. We use this model to examine the effects of (de)regulation policies and we search for the existence of policies that increase the utilities of both parties. We show that such Pareto improving policies exist and their implementation leads to an optimal degree of regulation.