The Impact of a Unionized Labor Market in a Schumpeterian Growth Model

Abstract

This paper analyzes the relationship between unemployment and growth, applying the seminal growth model of Aghion/Howitt (1992). We distinguish low skilled and high skilled labor and assume that a union bargains over the low skilled labor wage. This causes unemployment, but the growth effect is ambiguous. On the one hand, the higher wage will squeeze the expected profits of the researcher, which is bad for growth. On the other hand, the union affects the marginal product of high skilled labor, and, hence, the wage in the manufacturing sector declines. This causes a migration of high skilled labor from the manufacturing into the research sector. This effect is growth enhancing. We show that the overall effect crucially depends on the elasticity of substitution between high skilled and low skilled labor. Is this elasticity smaller than one the good growth effect dominates the bad and vice versa. In the Cobb Douglas case both effects cancel out.