Can Trade Unions Increase Social Welfare? An R&D Model with Cash-in-Advance Constraints

Neto, António and Furukawa, Yuichi and Ribeiro, Ana Paula (2017): Can Trade Unions Increase Social Welfare? An R&D Model with Cash-in-Advance Constraints.

Abstract

Economic growth crucially depends on the level of R&D investment, as well as on the existing labour market institutions (LMI); the latter might shape the amount of profit obtained by each firm and its incentives to continuously innovate. This paper proposes a novel analysis combining a Schumpeterian growth model with cash-in-advance (CIA) constraints on R&D to study the impact of trade unions on economic growth and social welfare. Two main results arise: one the one hand, economic growth is always decreasing in trade union’s markup and interest rate. However, in terms of social welfare, although Friedman rule appears to be optimal across all the considered scenarios, free labour market can be suboptimal below a specific threshold level of economic growth, depending on whether there is over or underinvestment in R&D. Hence, by demanding a wage above the perfect competition equilibrium, trade unions can have a positive impact on welfare through a reallocation of labour among sectors. This relationship seems to be stronger for countries with lower labour share and higher rents in the intermediate sector. This latter case highlights the redistributive effect of trade unions, contributing for a decrease in inequality between monopolists and workers. Therefore, for the case of the Eurozone, a “common” labour market setting might be more “inefficient” than a common monetary policy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Employment, trade unions, economic growth, R&D
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; J - Labor and Demographic Economics > J5 - Labor-Management Relations, Trade Unions, and Collective Bargaining > J51 - Trade Unions: Objectives, Structure, and Effects; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O42 - Monetary Growth Models

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