Equilibrium Unemployment With Credit and Labour Market Imperfections

38 Pages Posted: 6 Apr 2001

See all articles by Erkki Koskela

Erkki Koskela

University of Helsinki - Department of Political and Economic Studies; CESifo (Center for Economic Studies and Ifo Institute); Bank of Finland - Research Department; IZA Institute of Labor Economics

Rune Stenbacka

Hanken School of Economics

Date Written: March 16, 2001

Abstract

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.

Keywords: wage and loan bargaining, compensation systems, equilibrium unemployment

JEL Classification: J51, J41,G32

Suggested Citation

Koskela, Erkki and Stenbacka, Rune, Equilibrium Unemployment With Credit and Labour Market Imperfections (March 16, 2001). CESifo Working Paper Series No. 419; Bank of Finland Research Discussion Paper No. 5/2001. Available at SSRN: https://ssrn.com/abstract=265416

Erkki Koskela (Contact Author)

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 54
FIN-00014 Helsinki
Finland
+358 9 191 8894 (Phone)
+358 9 191 8877 (Fax)

HOME PAGE: http://www.cesifo.de/servlet/page?_pageid=56&_dad=portal30&_schema=PORTAL30&pa_id=7298

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Bank of Finland - Research Department ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Rune Stenbacka

Hanken School of Economics ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland
+35 89 4313 3433 (Phone)
+35 89 4313 3382 (Fax)

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