Two-stage bargaining with coverage extension in a dual labour market

This paper studies coverage extension in a simple general equilibrium model with a dual labour market. The union sector is characterized by two-stage bargaining whereas the firms set wages in the non-union sector. In this model firms and unions of the union sector have a commonality of interest in extending coverage of a minimum wage to the non-union sector. Furthermore, the union sector does not seek to increase the non-union wage to a level above the market-clearing wage. In fact, it is optimal for the union sector to impose a market-clearing wage on the non-union sector. Finally, coverage extension increases welfare in this model.