Does union bargaining power always raise union wages?

Despite falling unionization rates, the union wage premium remains a robust empirical regularity. To shed light on this contrasting wage impact of unions, we develop a union wage model with firm heterogeneity and a social insurance system. In the absence of a fiscal sector, greater bargaining power raises union wages and lowers nonunion wages. In contrast, when unemployment benefits adjust endogenously to balance the government budget, greater bargaining power instead lowers union wages and raises nonunion wages. Our results suggest that understanding the wage impact of unions depends critically on the interaction between firm heterogeneity and the social insurance system.