ECONOMIC-REFORM AND LABOR UNIONS - A GENERAL-EQUILIBRIUM ANALYSIS APPLIED TO BANGLADESH AND INDONESIA

Noting the trend toward more independent trade unions in developing co untries, this article examines whether the presence of unions strength ens or weakens the benefits to be gained from economic policy reform. We show that the presence of ''passive'' unions-ones that choose their wage-employment contract given the firm's cost-minimizing strategy-in creases the welfare gains from trade liberalization, be cause trade re form lowers the wage premium enjoyed by the unionized sector, reducing a distortion in the labor market. These gains are amplified when the unions are ''active,'' namely, when they negotiate a contract with the firm that is off its labor demand curve. Such a contract results in f eatherbedding-paying workers more than their marginal product-and trad e reform reduces the amount of featherbedding. The policy implication for Bangladesh-a country with strong trade unions and a protected unio nized sector-is that the benefits of further trade liberalization may be greater than otherwise predicted. In Indonesia, where both unioniza tion and import tariffs are low, allowing greater independence to unio ns may preserve flexibility and reward workers better than the current minimum-wage policy.