Wage Bargaining and Induced Technical Change in a Linear Economy: Model and Application to the US (1963-2003)
In a simple one-sector, two-class, fixed-proportions economy, wages are set through axiomatic bargaining a la Nash . As for choice of technology, firms choose the direction of factor augmentations to maximize the rate of unit cost reduction (Kennedy , and more recently Funk ). The aggregate environment resulting by self-interested decisions made by economic agents is described by a two-dimensional dynamical system in the employment rate and output/capital ratio. The economy converges cyclically to a long-run equilibrium involving a Harrod-neutral prole of technical change, a constant rate of employment of labor, and constant input shares. The type of oscillations predicted by the model matches the available data on the United States (1963-2003). Finally, institutional change, as captured by variations in workers' bargaining power, has a positive effect on the rate of output growth but a negative effect on employment.
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