Unions, Growth and Inequality in a Schumpeterian Economy

Wang, Di and Wang, Xilin (2025): Unions, Growth and Inequality in a Schumpeterian Economy.

Abstract

This paper explores the dynamic effects of labor unions on economic growth and income inequality in a Schumpeterian growth model with heterogeneous households and endogenous market structure. Income inequality arises from an unequal distribution of wealth and heterogeneous labor productivity. In the short run, increasing union bargaining power reduces both growth and inequality when the union is wage-oriented. In the long run, stronger unions continue to lower inequality without affecting the steady-state growth rate. The model identifies the channels through which unions shape inequality: an income-share shift from asset income to labor income, wage compression, and changes in the wealth-wage correlation. Calibrating the model to U.S. data, we find that increasing union bargaining power significantly reduces long-run income inequality.

• Item Type: MPRA Paper
• Language: English
• Keywords: Labor unions; Economic growth; Income inequality; Endogenous market structure
• Subjects: D - Microeconomics > D3 - Distribution > D30 - General; J - Labor and Demographic Economics > J5 - Labor-Management Relations, Trade Unions, and Collective Bargaining > J50 - General; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O30 - General; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General

References

Acikgoz, O., and Kaymak, B., 2014. The rising skill premium and deunionization. Journal of Monetary Economics, 63, 37-50.

Acemoglu, D., Aghion, P., and Violante, G., 2001. Deunionization, technical change and inequality. Carnegie-Rochester Conference Series on Public Policy, 55, 229-264.

Aghion, P., Akcigit, U., Bergeaud, A., Blundell, R., and Hemous, D., 2019. Innovation and top income inequality. Review of Economic Studies, 86, 1-45.

Aghion, P., and Howitt, P., 1992. A model of growth through creative destruction. Econometrica, 60, 323-351.

Ang, J., and Madsen, J., 2011. Can second-generation endogenous growth models explain the productivity trends and knowledge production in the Asian miracle economies?. Review of Economics and Statistics, 93, 1360-1373.

Card, D., Lemieux, T., and Riddell, W., 2004. Unions and Wage Inequality. Journal of Labor Research, 25, 519-559.

Chang, J., and Hung, H., 2016. Trade unions, unemployment, economic growth, and income inequality. Macroeconomic Dynamics, 20, 404-428.

Chang, J., Shaw, M., and Lai, C., 2007. A "managerial" trade union and economic growth. European Economic Review, 51, 365-384.

Chou, C.-F., and Talmain, G., 1996. Redistribution and growth: Pareto improvements. Journal of Economic Growth, 1, 505-523.

Chu, A., 2010. Effects of patent policy on income and consumption inequality in an R&D-based growth model. Southern Economic Journal, 77, 336-350.

Chu, A., and Cozzi, G., 2018. Effects of patents versus R&D subsidies on income inequality. Review of Economic Dynamics, 29, 68-84.

Chu, A., Cozzi, G., Fan, H., Furukawa, Y., and Liao, C., 2019. Innovation and inequality in a monetary Schumpeterian model with heterogeneous households and firms. Review of Economic Dynamics, 34, 141-164.

Chu, A., Cozzi, G., and Furukawa, Y., 2016. Unions, innovation and cross-country wage inequality. Journal of Economic Dynamics & Control, 64, 104-118.

Chu, A., Furukawa, Y., Mallick, S., Peretto, P., and Wang, X., 2021. Dynamic effects of patent policy on innovation and inequality in a Schumpeterian economy. Economic Theory, 71, 1429-1465.

Chu, A., Kou, Z., and Liu, X., 2018. Labor union and the wealth-income ratio. Economics Letters, 167, 29-35.

Chu, A., Kou, Z., and Wang, X., 2020. Effects of patents on the transition from stagnation to growth. Journal of Population Economics, 33, 395--411.

Chu, A., Liao, C., and Peretto, P., 2025. Dynamic effects of taxation in an unequal Schumpeterian economy. European Economic Review, 178, 105071.

Chu, A., and Peretto P., 2023. Innovation and Inequality from Stagnation to Growth. European Economic Review, 160: 104615.

Cohen, W., and Klepper, S., 1996a. A reprise of size and R&D. Economic Journal, 106, 925-951.

Cohen, W., and Klepper, S., 1996b. Firm size and the nature of innovation within industries: the case of process and product R&D. Review of Economics and Statistics, 78, 232-243.

De Loecker, J., Eeckhout, J., and Unger, G., 2020. The rise of market power and the macroeconomic implications. Quarterly Journal of Economics, 135, 561-644.

Dinlersoz, E., and Greenwood, J., 2016. The rise and fall of unions in the United States. Journal of Monetary Economics, 83, 129-146.

Flanagan, R., 1999. Macroeconomic performance and collective bargaining: An international perspective. Journal of Economic Literature, 37, 1150-1175.

Farber, H., Herbst, D., Kuziemko, I., and Naidu, S., 2021. Unions and inequality over the twentieth century: New evidence from survey data. Quarterly Journal of Economics, 136, 1325-1385.

Foellmi, R., and Zweimuller, J., 2006. Income distribution and demand-induced innovations. Review of Economic Studies, 73, 941-960.

Garcia-Penalosa, C., and Wen, J.-F., 2008. Redistribution and entrepreneurship with Schumpeterian growth. Journal of Economic Growth, 13, 57-80.

Giandrea, M., and Sprague, S., 2017. Estimating the U.S. labor share. Monthly Labor Review, U.S. Bureau of Labor Statistics, February, https://doi.org/10.21916/mlr.2017.7.

Grossman, G., and Helpman, E., 1991. Quality ladders in the theory of growth. Review of Economic Studies, 58, 43-61.

Ha, J., and Howitt, P., 2007. Accounting for trends in productivity and R&D: A Schumpeterian critique of semi-endogenous growth theory. Journal of Money, Credit and Banking, 39, 733-774.

Heathcote, J., Storesletten, K., and Violante, G., 2010. The macroeconomic implications of rising wage inequality in the United States. Journal of Political Economy, 118, 681-722.

Howitt, P., 1999. Steady endogenous growth with population and R&D inputs growing. Journal of Political Economy, 107, 715-730.

Iacopetta, M., Minetti, R., and Peretto, P., 2019. Financial markets, industry dynamics and growth. Economic Journal, 129, 2192-2215.

Jager, S., Naidu, S., and Schoefer, B., 2024. Collective bargaining, unions, and the wage structure: an international perspective, National Bureau of Economic Research Working Paper, 33267.

Jaumotte F., and Buitron, C., 2020. Inequality: Traditional drivers and the role of union power. Oxford Economic Papers, 72, 25-58.

Ji, L., Chang, J., and Huang, C., 2016. Unionization, market structure and economic growth. Southern Economic Journal, 82, 935-951.

Jones, C., and Kim, J., 2018. A Schumpeterian model of top income inequality. Journal of Political Economy, 126, 1785-1826.

Kiedaisch, C., 2020. Growth and welfare effects of intellectual property rights when consumers differ in income. Economic Theory, 72, 1121-1170.

Koh, D., Santaeulalia-Llopis, R., and Zheng, Y., 2020. Labor share decline and intellectual property products capital. Econometrica, 88, 2609-2628.

Kuhn, M., and Rios-Rull, J.-V., 2016. 2013 update on the U.S. earnings, income, and wealth distributional facts: a view from macroeconomics. Federal Reserve Bank of Minneapolis Quarterly Review 3711, 37, 1-73.

Laincz, C., and Peretto, P., 2006. Scale e¤ects in endogenous growth theory: An error of aggregation not specification. Journal of Economic Growth, 11, 263-288.

Madsen, J., 2008. Semi-endogenous versus Schumpeterian growth models: Testing the knowledge production function using international data. Journal of Economic Growth, 13, 1-26.

Madsen, J., 2019. Wealth and inequality over eight centuries of British capitalism. Journal of Development Economics, 138, 246-260.

Madsen, J., Minniti, A., and Venturini, F., 2021. Wealth inequality in the long run: A Schumpeterian growth perspective. Economic Journal, 131, 476-497.

Mogstad, M., Salvanes, K., and Torsvik, G., 2025. Income equality in the Nordic countries: myths, facts, and lessons. Journal of Economic Literature, forthcoming.

Palokangas, T., 1996. Endogenous growth and collective bargaining. Journal of Economic Dynamics and Control, 20, 925-944.

Pemberton, J., 1988. A "managerial" model of the trade union. Economic Journal, 98, 755-771.

Peretto, P., 1998. Technological change and population growth. Journal of Economic Growth, 3, 283-311.

Peretto, P., 1999. Cost reduction, entry, and the interdependence of market structure and economic growth. Journal of Monetary Economics, 43, 173-195.

Peretto, P., 2007. Corporate taxes, growth and welfare in a Schumpeterian economy. Journal of Economic Theory, 137, 353-382.

Peretto, P., 2011. The growth and welfare effects of deficit-financed dividend tax cuts. Journal of Money, Credit and Banking, 43, 835-869.

Piketty, T., 2014. Capital in the Twenty-First Century. Harvard University Press, Cambridge.

Piketty, T., and Zucman, G., 2014. Capital is back: wealth-income ratios in rich countries 1700-2010. Quarterly Journal of Economics, 129, 1255-1310.

Romer, P., 1990. Endogenous technological change. Journal of Political Economy, 98, S71-S102.

Segerstrom, P., Anant, T., and Dinopoulos, E., 1990. A Schumpeterian model of the product life cycle. American Economic Review, 80, 1077-1091.

Schetter, U., Schneider, M., and Jaggi, A., 2024. Inequality, openness, and growth through creative destruction. Journal of Economic Theory, 222, 105887.

Smulders, S., and van de Klundert T., 1995. Imperfect competition, concentration and growth with firm-specific R&D. European Economic Review, 39, 139-160.

Taschereau-Dumouchel, M., 2020. The union threat. Review of Economic Studies, 87, 2859-2892.

Vollrath, D., 2024. The elasticity of aggregate output with respect to capital and labor. American Economic Journal: Macroeconomics, 16: 470-504.

Young, A., 1998. Growth without scale effects. Journal of Political Economy, 106, 41-63.

Zweimuller, J., 2000. Schumpeterian entrepreneurs meet Engel's law: The impact of inequality on innovation-driven growth. Journal of Economic Growth, 5, 185-206.