Globalization, Trade Unions and Aggregate Demand Effects∗

Using an economic geography model, we analyze the impact of an increase in trade unions’ bargaining strength on firms’ location decision. We show that an increase in workers’ bargaining power entails two effects. On the one hand, the standard labor cost effect induces firms to relocate their production abroad. On the other hand, trade unions, by stealing profits from foreign capitalists, create a positive aggregate demand effect in their country, which may paradoxically attract firms. We show that the latter effect dominates, provided that transport costs are high enough. However, this result vanishes if trade unions create too much unemployment, or if wage bargaining is efficient. Journal of Economic Literature Classification Number: F12, F16, F21, J51.