National Wage Contracts, Monopsony, and Welfare in a North-South Economy,

In countries characterized by significant geographical disparities in productivity, nationwide labour contracts may cause local unemployment by preventing the adjustments that would occur in a competitive labour market. Here we argue, however, that when there are mobility frictions and monopsony power, nationwide contracts may still be preferable to local contracts. Using a spatial general equilibrium model calibrated on the Italian North-South divide, we suggest that nationwide wage contracts may still lead to narrower regional welfare gaps if monopsony power is sufficiently strong in low-productivity areas.