Monopoly Union Wage Setting and Evaluation of Public Projects: An Intertemporal General Equilibrium Approach

Abstract

This paper contains cost-benefit rules for public projects in a small open economy with a tradeable and non-tradeable sector, where wage setting is done by a representative household. The interpretation, with regard to traditional trade union theory, is in terms of a general equilibrium version of a monopoly union model. The intertemporal character of the model makes it possible to consider public projects which involve the creation of infrastructure that improves the future productivity of both labour and capital. A special feature of the model is the introduction of endogenous investment behaviour. However, since private investment is optimally adjusted in the initial equilibrium, envelope properties guarantee that first-order projects will only have second-order repercussions through changed investment behaviour, which means that indirect changes in private investment do not enter the project evaluation rules for small projects.