Erkki Koskela* - Rune Stenbacka**

Abstract

We investigate the interaction between labour and credit market imperfections for equilibrium unemployment in the presence of profit sharing. Our analysis highlights the critical role of the outside option available of employees for the evaluation of the employment implications of intensified credit market competition. In a partial equilibrium with exogenous outside options increased bargaining power of banks has adverse employment effects. In a general equilibrium with endogenous outside options this relationship is frequently reversed; intensified credit market competition increases equilibrium unemployment if the labour market imperfections -- measured by the bargaining power of trade unions - are sufficiently strong