Labour Market Regulation, Productivity-Improving R&D and Endogenous Growth

Abstract

We present a growth model in which R&D increases productivity, union-firm bargainingdetermines the distribution of rents and the government can support unions by labour marketregulation. We show that if unions are initially very strong, regulation increases only theworkers’ profit share and has no impact on employment and growth. Otherwise, regulationincreases wages. Because firms try to escape this cost increase through the improvement ofproductivity by R&D, the economy grows faster. Regulation (deregulation) is desirable whenthe growth rate is below (above) some critical level.

Keywords: regulation, labour unions, endogenous growth

JEL Classification: O40, J50