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Economic Growth with Political Lobbying and Wage Bargaining

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Author Info

  • Palokangas, Tapio K.

    ()
    (University of Helsinki)

Abstract

This paper examines an economy with a large number of industries, each producing a different good. Technological change follows a Poisson process where firms improve their productivity through investment in R&D. The less there are firms in the economy or the more they can coordinate their actions, the higher their profits. Labor is used in production or R&D. All workers are unionized and their wages depend on relative union bargaining power. If this power is high enough, then there is involuntary unemployment. Both workers and firms lobby the central planner of the economy which affects firms' and unions' market power. The main findings of the paper can be summarized the follows. The central planner can increase its welfare either (a) by increasing the level of income or (b) by speeding up economic growth. If (a) is more effective than (b), then the central planner eliminates union power altogether to have full employment. On the other hand, if (b) is more effective than (a), then the central planner supports labor unions to promote cost-escaping R&D.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4091.

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Length: 18 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:iza:izadps:dp4091

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Keywords: endogenous technological change; market power; labor unions; economic integration;

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