Abstract
The effect of labor market institutions on the unemployment rate has been widely studied in macroeconomic dynamics. Union influence is one of the most important issues in the labor market institutions. Thus, this study investigates the effects of union influence on wages with regard to employment dynamics using an overlapping generations model with closed economy. We assume a wage setting equation that is discussed in the existing literature and we consider an economy in which unemployment exists. The model shows that high upward pressure on wages leads to low employment rates not only in the steady state but also on the equilibrium path.
Highlights
The relationship between labor market institutions and unemployment has been researched in many studies
The effect of labor market institutions on the unemployment rate has been widely studied in macroeconomic dynamics
This study investigates the effects of union influence on wages with regard to employment dynamics using an overlapping generations model with closed economy
Summary
The relationship between labor market institutions and unemployment has been researched in many studies. Layard et al [6] discuss the importance of trade unions in the European labor market, in which the union membership ratio and coverage ratio are proxy variables for influence of trade union on wage setting or un-. Bräuninger [11], Corneo and Marquardt [12], Josten [13], and Ono [14] study union influence on unemployment (employment) using overlapping generations models. We consider an overlapping generations economy and assume a wage-setting equation that is discussed in Blanchard [15]. This study shows that high upward pressure on wage brings low employment rates in the steady state and on the equilibrium path.
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