Economic growth with political lobbying and wage bargaining

Palokangas T (2009). Economic growth with political lobbying and wage bargaining. In: Proceedings of CAO'09: IFAC Workshop on Control Applications of Optimisation, 6-8 May 2009.

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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. Unions' and firms' market power decreases the level of income at each moment of time. On the other hand, the greater the firm's share of value added or the higher union wages, more incentives the firm has to increase the productivity of labor through R&D. In this respect, there can be an optimal amount of unions' and firms' market power. Concerning the regulation of relative union bargaining power, 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.

Item Type: Conference or Workshop Item (UNSPECIFIED)
Uncontrolled Keywords: Extensive game; Maximum principle; Stochastic dynamic programming; Alternative offers game; Common agency
Research Programs: Dynamic Systems (DYN)
Bibliographic Reference: In:; Proceedings of CAO'09: IFAC Workshop on Control Applications of Optimisation; 6-8 May 2009, University of Jyvaeskylae, Agora, Finland
Depositing User: IIASA Import
Date Deposited: 15 Jan 2016 08:42
Last Modified: 20 Jan 2016 16:45
URI: http://pure.iiasa.ac.at/9054

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