Decentralized wage setting in search equilibrium models is inefficient because the meeting firm and worker ignore the dependence of job-matching probabilities on the number of firms and workers engaged in search. This paper investigates whether risk-neutral monopolistic unions will have an incentive to internalize this externality. I find that the externality will be internalized only if the union's policy is chosen by unemployed persons. If employed persons influence union policy, both the union wage and unemployment will be too high. A tax on the union wage combined with an employment subsidy to firms can correct this inefficiency.

This paper demonstrates that if both firms and workers search the other side of the market for job matches the equilibrium rate of unemployment is likely to be too high. Both sides ignore a positive externality of their search: when they establish a job match they remove from the market a job searcher, so they save society his search costs. I show that there is no feasible wage rate that can internalize this externality under fairly weak restrictions on the technology of search.

We consider the relation between wages and productivity by means of a model based on the following assumptions. Workers live for 2 periods, firms live forever, senior workers differ nontrivially from junior, seniority enhances workers' expected second-period earnings, both firms and workers recognize the prospect of promotion and the senior-junior wage differential at the time of hiring, and firms have monopsony power in hiring junior workers. We show that senior wages are equal to the senior marginal product, but junior wages are set below the junior marginal product by an amount that depends on the elasticity of the firm's labor supply.