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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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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2001/wp-cesifo-2001-02/cesifo_wp419.pdf
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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
    Date of revision:
    Handle: RePEc:ces:ceswps:_419

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

    References

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    1. repec:fth:bfdipa:12/2000 is not listed on IDEAS
    2. Stephen Nickell & D Nicolitsas, 1995. "How Does Financial Pressure Affect Firms?," CEP Discussion Papers dp0266, Centre for Economic Performance, LSE.
    3. Dalmazzo, Alberto, 1996. " Debt and Wage Negotiations: A Bankruptcy-Based Approach," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(3), pages 351-64.
    4. 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.
    5. Coricelli, Fabrizio & Cukierman, Alex & Dalmazzo, Alberto, 2000. "Monetary Institutions, Monopolistic Competition, Unionized Labour Markets And Economic Performance," CEPR Discussion Papers 2407, C.E.P.R. Discussion Papers.
    6. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier.
    7. Zsolt Becsi & Victor Li & Ping Wang, 2000. "Financial Matchmakers in Credit Markets with Heterogeneous Borrowers," Vanderbilt University Department of Economics Working Papers 0032, Vanderbilt University Department of Economics.
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    9. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475, October.
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    13. 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.
    14. 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.
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    16. 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.
    17. 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.
    18. 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.
    19. Koskela, Erkki & Stenbacka, Rune, 2000. "Agency Cost of Debt and Lending Market Competition: A Re-Examination," Research Discussion Papers 12/2000, Bank of Finland.
    20. Perotti, Enrico C & Spier, Kathryn E, 1993. "Capital Structure as a Bargaining Tool: The Role of Leverage in Contract Renegotiation," American Economic Review, American Economic Association, vol. 83(5), pages 1131-41, December.
    21. 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.
    22. 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.
    23. 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.
    24. Daron Acemoglu, 2000. "Credit Market Imperfections and Persistent Unemployment," NBER Working Papers 7938, National Bureau of Economic Research, Inc.
    25. 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.
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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. Kauhanen, Antti & Piekkola, Hannu, 2002. "Rent Sharing as Part of Incentive Payments and Recruitment," Discussion Papers 793, The Research Institute of the Finnish Economy.
    3. Piekkola, Hannu & Haaparanta, Pertti, 1999. "Liquidity Constraints Faced by Firm and Employment," Discussion Papers 695, The Research Institute of the Finnish Economy.

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