Quantitative Trade Restrictions in Unionized Economies

Abstract

This paper models the interactions of a labor union and a monopoly firm under an import quota in a small open economy. The distorted equilibrium is depicted in a diagram, in which wages and employment in both sectors, and the monopoly rent can be identified. The imposition of an import quota in the unionized sector reduces monopoly rent, union employment and wages in both sectors, compared with the case of autarky. In addition, we present several surprising comparative statics results. For instance, an increase in the world price causes the protected (i.e., `wrong') sector to shrink, wages to decrease, and national income to rise if the initial world price is low.

Keywords: Quotas, Unions, Imperfect Competition, Trade

JEL Classification: F1, J3