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In most European countries, the redefinition of employment contracts and their termination procedures is at the heart of current debates in labor market economic policies. This debate draws on the impressive research on the connection between job protection and labor market performance that has accumulated over the last decade. Nevertheless, there is a curious omission in these studies with regard to the degree of centralization of wage bargaining, which varies significantly between European labor markets. The aim of this paper is precisely to envisage from a theoretical perspective, the nature of interactions between labor market policies and levels of bargaining. In this context, we will develop a dynamic labor market model following Pissarides (2000), which incorporates economic sectors. Our analysis shows that negotiations by sector constantly lead to an inefficient allocation of resources. This illustrates the need for a well-designed labor market policy. We will show how a set of policies, especially tax and job protection policies, is conducive to ensuring a first best allocation.