Equilibrium Unemployment and Credit Market Imperfections: The Critical Role of Labor Mobility
31 Pages Posted: 21 Feb 2002
Date Written: January 2002
We investigate the interaction between labor and credit market imperfections for the determination of equilibrium unemployment within the framework of the "right-to-manage" approach. Our analysis highlights the critical role of labor mobility for the evaluation of the employment implications of intensified credit market competition. Without labor mobility increased bargaining power of banks will have adverse employment effects. However, with a labor force mobile across industries this relationship is frequently reversed if firms adopt profit sharing schemes. If employment at a fixed wage complements unemployment benefits to constitute the trade union's relevant outside option, intensified credit market competition will increase equilibrium unemployment. This relationship is shown to hold also for cases where the outside option incorporates profit sharing schemes as long as the labor market imperfections measured by the relative bargaining power of the trade unions are sufficiently strong.
Keywords: Wage and Loan Bargaining, Compensation Systems, Equilibrium Unemployment, Outside Options
JEL Classification: J51, J41, G32
Suggested Citation: Suggested Citation