Unions, wage setting, and economic growth

In this paper we analyse the growth effects of union wage bargaining within an expanding product variety growth model. We identify two channels through which unionisation will affect the rate of growth. Firstly, unions capture monopoly profits and thus give rise to a hold-up problem. Firms have less incentive to invest in research. This ceteris paribus dampens the growth rate. Secondly, unionisation changes the “de facto” skill abundance of the economy. This results in a resource reallocation á la Rybczynski, which may be growth enhancing. We derive the conditions for the dominance of either effects and demonstrate how these will change, with the institutional setting of the bargain.