Equilibrium Unemployment With Credit and Labour Market Imperfections
University of Helsinki - Department of Political and Economic Studies; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Bank of Finland - Research Department; Institute for the Study of Labor (IZA)
Swedish School of Economics and Business Administration
March 16, 2001
CESifo Working Paper Series No. 419
Bank of Finland Research Discussion Paper No. 5/2001
We study the role of labour and credit market imperfections in the determination of equilibrium unemployment. In the credit market, loan contracts are negotiated between financiers and firms, both of which have bargaining power, while firms and organized labour bargain over the base wage. The sequential labour and credit market negotiations are assumed to take place conditional on the firm having committed to the use performance-related profit sharing in addition to the negotiated base wage. It is shown that, in the presence of profit sharing, intensified credit market competition will raise equilibrium unemployment, because it induces wage-enhancing effects that cause an increase in the outside option available to union members. Equilibrium unemployment, which is also an increasing function of firms' bankruptcy risks, is however independent of the extent of credit market imperfection, provided that the compensation system is unrelated to firms' profits or that there is a monopoly union in the labour market.
Number of Pages in PDF File: 38
Keywords: wage and loan bargaining, compensation systems, equilibrium unemployment
JEL Classification: J51, J41,G32Accepted Paper Series
Date posted: April 6, 2001
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