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Equilibrium Unemployment with Credit and Labour Market Imperfections

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  • Erkki Koskela
  • Rune Stenbacka
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    Abstract

    We study the role of labour and credit market imperfections for the determination of equilibrium unemployment. In the credit market loan contracts are negotiated between financiers and firms, both possessing bargaining power, while the firms and organized labour bargain over the base wage. The sequential labour and credit market negotiations are assumed to take place conditional on the firm having committed itself to use performance-related profit sharing in addition to the negotiated base wage. It is shown that in the presence of profit sharing intensified credit market competition will raise equilibrium unemployment, because it induces wage-enhancing effects causing an increase in the outside option available to union members. Equilibrium unemployment is also an increasing function of firms' bankruptcy risks. It is, however, independent of the degree credit market imperfections if the compensation system is unrelated to firms' profits or if there is a monopoly union in the labour market.

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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 419.

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    Date of creation: 2001
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    Handle: RePEc:ces:ceswps:_419

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    Keywords: Wage and loan bargaining; compensation systems; equilibrium unemployment;

    References

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    1. Dalmazzo, Alberto, 1996. " Debt and Wage Negotiations: A Bankruptcy-Based Approach," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(3), pages 351-64.
    2. Dasgupta, Sudipto & Sengupta, Kunal, 1993. "Sunk Investment, Bargaining and Choice of Capital Structure," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 203-20, February.
    3. Nickell, S. & Nicolitsas, D., 1995. "How Does Financial Pressure Affect Firms," Economics Series Working Papers 99170, University of Oxford, Department of Economics.
    4. Haskel, Jonathan & Sanchis, Amparo, 1995. "Privatisation and X-Inefficiency: A Bargaining Approach," Journal of Industrial Economics, Wiley Blackwell, vol. 43(3), pages 301-21, September.
    5. Michael Funke & Wolf Maurer & Holger Strulik, 1998. "Capital Structure and Labour Demand: Investigations Using German Micro Data," Quantitative Macroeconomics Working Papers 19801, Hamburg University, Department of Economics.
    6. Jerger, Jurgen & Michaelis, Jochen, 1999. " Profit Sharing, Capital Formation and the NAIRU," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(2), pages 257-75, June.
    7. Richard Layard & Stephen Nickell, 1998. "Labour Market Institutions and Economic Performance," CEP Discussion Papers dp0407, Centre for Economic Performance, LSE.
    8. Zsolt Becsi & Victor Li & Ping Wang, 2000. "Financial matchmakers in credit markets with heterogeneous borrowers," Working Paper 2000-14, Federal Reserve Bank of Atlanta.
    9. Fabrizio Coricelli & Alex Cukierman & Alberto Dalmazzo, 2006. "Monetary Institutions, Monopolistic Competition, Unionized Labor Markets and Economic Performance," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 39-63, 03.
    10. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
    11. Acemoglu, Daron, 2001. "Credit market imperfections and persistent unemployment," European Economic Review, Elsevier, vol. 45(4-6), pages 665-679, May.
    12. Weitzman, Martin L, 1985. "The Simple Macroeconomics of Profit Sharing," American Economic Review, American Economic Association, vol. 75(5), pages 937-53, December.
    13. Perotti, E.C. & Spier, K.E., 1991. "Capital Structure As A Bargaining Tool: The Role Of Leverage In Contract Renegociation," Harvard Institute of Economic Research Working Papers 1548, Harvard - Institute of Economic Research.
    14. Koskela, Erkki & Stenbacka, Rune, 2000. "Is there a tradeoff between bank competition and financial fragility?," Journal of Banking & Finance, Elsevier, vol. 24(12), pages 1853-1873, December.
    15. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
    16. Simon P. Anderson & Michael Devereux, 1989. "Profit-Sharing and Optimal Labour Contracts," Canadian Journal of Economics, Canadian Economics Association, vol. 22(2), pages 425-33, May.
    17. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475, April.
    18. Hoon, Hian Teck, 2001. "General-Equilibrium Implications of International Product-Market Competition for Jobs and Wages," Oxford Economic Papers, Oxford University Press, vol. 53(1), pages 138-56, January.
    19. M. Andersen, Torben & Rose S rense, Jan, 2000. "Product Market Integration and Wage Formation," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 15, pages 281-293.
    20. Olivier Blanchard & Justin Wolfers, 1999. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," NBER Working Papers 7282, National Bureau of Economic Research, Inc.
    21. Koskela, Erkki & Stenbacka, Rune, 2000. "Agency Cost of Debt and Lending Market Competition: A Re-Examination," Research Discussion Papers 12/2000, Bank of Finland.
    22. Bronars, Stephen G & Deere, Donald R, 1991. "The Threat of Unionization, the Use of Debt, and the Preservation of Shareholder Wealth," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 231-54, February.
    23. Pissarides, Christopher A, 1999. "Policy Influences on Unemployment: The European Experience," Scottish Journal of Political Economy, Scottish Economic Society, vol. 46(4), pages 389-418, September.
    24. Ricardo J. Caballero & Mohamad L. Hammour, 1998. "Improper Churn: Social Costs and Macroeconomic Consequences," NBER Working Papers 6717, National Bureau of Economic Research, Inc.
    25. Coricelli, Fabrizio & Cukierman, Alex & Dalmazzo, Alberto, 2001. "Economic Performance and Stabilization Policy in a Monetary Union with Imperfect Labour and Goods Markets," CEPR Discussion Papers 2745, C.E.P.R. Discussion Papers.
    26. Weitzman, Martin L, 1987. "Steady State Unemployment under Profit Sharing," Economic Journal, Royal Economic Society, vol. 97(385), pages 86-105, March.
    27. repec:fth:bfdipa:12/2000 is not listed on IDEAS
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    Cited by:
    1. Koskela, Erkki & Stenbacka, Rune, 2004. "Profit Sharing, Credit Market Imperfections and Equilibrium Unemployment," IZA Discussion Papers 1020, Institute for the Study of Labor (IZA).
    2. Piekkola, Hannu & Haaparanta, Pertti, 1999. "Liquidity Constraints Faced by Firm and Employment," Discussion Papers 695, The Research Institute of the Finnish Economy.
    3. Kauhanen, Antti & Piekkola, Hannu, 2002. "Rent Sharing as Part of Incentive Payments and Recruitment," Discussion Papers 793, The Research Institute of the Finnish Economy.

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