Wage pacts and economic growth

Abstract

PurposeThe purpose of this paper is to theoretically investigate the impact of wage pacts on economic growth.Design/methodology/approachThis paper presents an innovation driven endogenous growth model, where firms and unions bargain over wages.FindingsFinds that the degree of centralization of the bargaining structure plays a crucial rule for economic performance. Central bargaining, which incorporates the leapfrogging externality incorporated in firm‐level bargaining, will yield lower rates of unemployment for a given rate of economic growth. The increase in labor resources will in turn also yield faster growth rates in a corporatist economy. Indeed, when unions focus on issues other than short term wage increases, they may even outperform the non‐unionized economy, as they can internalize the knowledge externality through long‐term wage moderation pacts.Research limitations/implicationsThe paper is theoretical with some anecdotal evidence, and lacks thorough empirical testing.Practical implicationsThere are strong implications for economic policy, suggesting the promotion of wage pacts. Before implementation, prior empirical conformation of the results is required.Originality/valueThis is the first paper that demonstrates under which conditions unions can promote economic growth and reduce unemployment through long‐term wage pacts.