Unions, Growth and Inequality in a Schumpeterian Economy

This paper explores the dynamic effects of labor unions on economic growth and income inequality in a Schumpeterian growth model with heterogeneous households and endogenous market structure. A representative labor union bargains with a representative employer to determine the labor income share and employment level. We find that, in the short run, an increase in union bargaining power reduces economic growth and income inequality when the union is wage-oriented. In the long run, while stronger union bargaining power continues to reduce income inequality, it does not affect the steady-state growth rate due to endogenous market structure adjustments. To conduct a quantitative analysis, we calibrate the model using U.S. data. Our findings indicate that increasing union bargaining power from the 2016 level to the 1980 level would reduce the welfare of the top 30% of households, with significantly larger welfare losses for higher-income groups. Conversely, the bottom 70% of households would experience welfare gains, which are disproportionately larger for lower-income groups.