One of the most important economic problems in Europe today is the apparently permanent high rate of unemployment associated with unionized labor markets. The effects of unionization on economic growth are recognized by the most part of the growth theoretical literature framed in the standard overlapping generations model to be either negative or at most neutral, with some exceptions. Developing a model in line with this strand of literature, we show a rather unusual result: the unionization of the labor market in the conventional double Cobb–Douglas economy may always promote economic growth when unemployment benefits are financed by a consumption tax rather than a wage tax, and the union’s preference weight on raising wages is sufficiently low.
A note on trade unions, unemployment insurance and endogenous growth
GORI, LUCA
2011-01-01
Abstract
One of the most important economic problems in Europe today is the apparently permanent high rate of unemployment associated with unionized labor markets. The effects of unionization on economic growth are recognized by the most part of the growth theoretical literature framed in the standard overlapping generations model to be either negative or at most neutral, with some exceptions. Developing a model in line with this strand of literature, we show a rather unusual result: the unionization of the labor market in the conventional double Cobb–Douglas economy may always promote economic growth when unemployment benefits are financed by a consumption tax rather than a wage tax, and the union’s preference weight on raising wages is sufficiently low.
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