Collective bargaining, firm heterogeneity and unemployment

► We study theoretically how the level of collective bargaining affects unemployment. ► We use a one-sector Mortensen-Pissarides model with firm-level productivity shocks. ► Unemployment is higher under sectoral bargaining than under firm-level bargaining. ► Interplay of heterogeneity and wage compression under centralized bargaining is key. ► Efficient opting-out of sectoral agreements replicates the decentralized outcome.