Union Power in the Long Run Reconsidered

Abstract

Considering an economy with only one wage-setting union - which has an infinite planning horizon and a constant rate of time preference - Kemp and Long (1987) examined the following problem. How does the pursuit of union objectives affect the path of economic development; in particular, does a union-ridden economy move towards a nontrivial steady state and, if so, is the steady state characterized by unemployment? Their own answer was as follows. The existence of a nontrivial steady state depends on the union's rate of time preference: if this is strong enough, the union will be content to see capital stock run down to zero. If and only if there is a nontrivial steady state will the union eventually (after finite time) find it advantageous to refrain from using its market power, that is, in the long run the union is effectively impotent. Kemp and Long's paper constituted a contribution in posing the problem correctly. It relied, however, on the Solow-Swan growth model with the following basic assumptions: a fixed saving-income ratio, a fixed rate of population growth and constant returns to scale in production. Now, let us consider this framework more closely. The first two assumptions were needed to enable the existence of a nontrivial steady state. In fact, if Kemp and Long had used a saving function which compelled consumption equal to income in the steady state (where there is no net investment), they would very likely have obtained the same results even without population growth. Such a saving function can be well based on the Permanent Income Hypothesis: the diminishing marginal utility of consumption creates an incentive to even out planned consumption across future periods. In the Solow-Swan framework, the crucial point is the assumption of constant returns to scale and we prefer to abolish it. We then have to ignore population growth as both technically inconvenient' and irrelevant to