Abstract

We show how in a heterogeneous labour market, a group of workers may benefit from rigid institutions. This is because they allow it to collectively exploit monopoly power at the expense of other groups that are complementary in production. It is shown that if rigidity arises, it is likely to be associated with employee rents. The greater the rent the fewer are the workers are exposed to unemployment and lower is the elasticity of labour demand. In some cases, rigidities are favoured over fiscal transfers because they are sustained by a larger coalition, including members of the taxed group.