Trade Unions, Investment and Employment in a Small Open Economy : A Dutch Perspective

A model of a small open economy with a well-developed supply-side and demand-side is presented. There are many firms engaged in monopolistic competition, who take the wage and aggregate demand as given, when deciding on their labour demand and investment decisions. Aggregate supply depends on capital, the producers’ real wage and aggregate demand; investment depends on what firms expect the real wage, aggregate demand, real interest rates and investment subsidies to be in current and future periods. Aggregate demand depends on disposable income, wealth, public spending, foreign income, the real exchange rate and the world real-interest rate. There is one monopoly union, who chooses the consumers real wage to maximise a utilitarian utility function subject to the constraints describing the rest of the economy. Its behaviour is time inconsistent, since it has an incentive to announce a low wage and then, once capital has been accumulated, renege and cream off the quasi-rent of a more-or-less fixed factor by demanding a higher wage. The time-consistent behaviour is credible but is inefficient due to much lower levels of capital, employment and activity. The results of this analysis are used to describe the Dutch rise in unemployment.(This abstract was borrowed from another version of this item.)