This paper studies the implications of a segmented labor market with efficient wage–

employment bargaining on the internal labor market and a competitive external labor

market on the temporary equilibrium of a closed monetary macroeconomy of the AS–

AD type with government activity, fiat money, and expectations. Workers have identical

preferences, those on the internal labor market are represented by a labor union. There

is no mobility between the labor markets.

Union power measured by the share of the production surplus allotted to the union

and union density measured by the fraction of workers who are union members impact

the functional income distribution, but neither affect the individual employment levels

nor the aggregate employment level and the aggregate supply function. The wage on the

internal labor market is above the wage on the external labor market if and only if the

profit share of total revenue is smaller than under a fully competitive labor market.

Unique temporary equilibria exist for all combinations of union power and union density.

The paper provides a complete comparative-statics analysis showing in particular a

negative price effect of union power and a positive price effect of union density. In general,

the effects of union power and union density on any equilibrium value are usually of

opposite signs. Single-labor-market models with a fully competitive or a fully unionized

labor market are special or limiting cases of the segmented-labor-market model.