A two-period unionized mixed oligopoly model: public–private wage differentials and “Eurosclerosis” reconsidered

In the context of a two-period unionized mixed oligopoly, we propose that—due to the public sector’s role in the market—public–private wage differentials in favor of the public sector employees emerge over the business cycle, under either an asymmetric or a symmetric firing restrictions regime across the public and the private sector. Under the former regime, firing costs are higher than (equal to) hiring costs in the public (private) sector, while under the latter regime firing/hiring costs are equal everywhere. The structure of the emerging product and labor market equilibria, as well as the volume and the distribution of welfare, are however quite different under the two regimes. In contrast to conventional beliefs, the asymmetric regime, as compared to the symmetric regime, entails higher aggregate output and employment over the business cycle. Moreover, a typical measure of social welfare dictates that the asymmetric regime should be sustained unless demand conditions significantly deteriorate during the recession.