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Equilibrium unemployment with credit and labour market imperfections

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  • Koskela, Erkki
  • Stenbacka, Rune

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.

Suggested Citation

  • Koskela, Erkki & Stenbacka, Rune, 2001. "Equilibrium unemployment with credit and labour market imperfections," Bank of Finland Research Discussion Papers 5/2001, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2001_005
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    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. Tito Boeri & Pietro Garibaldi & Espen R. Moen, 2012. "The Labor Market Consequences of Adverse Financial Shocks," Working Papers 451, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    4. Pietro Garibaldi, 2013. "Labor and Finance: Mortensen and Pissarides meet Holmstrom and Tirole," 2013 Meeting Papers 775, Society for Economic Dynamics.
    5. Kauhanen, Antti & Piekkola, Hannu, 2002. "Profit Sharing in Finland: Earnings and Productivity Effects," Discussion Papers 817, The Research Institute of the Finnish Economy.
    6. Lahdenperä, Harri, 2001. "Payment and financial innovation, reserve demand and implementation of monetary policy," Research Discussion Papers 26/2001, Bank of Finland.
    7. Piekkola, Hannu & Haaparanta, Pertti, 1999. "Liquidity Constraints Faced by Firm and Employment," Discussion Papers 695, The Research Institute of the Finnish Economy.
    8. Erkki Koskela & Rune Stenbacka, 2004. "Profit Sharing, Credit Market Imperfections and Equilibrium Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(4), pages 677-701, December.
    9. Saarenheimo, Tuomas, 2001. "Should unemployment benefits decrease as the unemployment spell lengthens?," Research Discussion Papers 23/2001, Bank of Finland.

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