Unionised Labour Market, Unemployment Allowances, Productive Public Expenditure and Endogenous Growth

Abstract

This paper develops a model of endogenous economic growth with special focus on the role of unionized labour market and on the interaction between the tax financed productive public expenditure and unemployment benefit policy of the government. We incorporate a ‘Managerial’ labour union in an otherwise identical Barro (1990) model; and use both ‘Efficient Bargaining’ model and ‘Right to Manage’ model to solve the negotiation problem between a labour union and an employers’ association. Properties of growth rate maximizing income tax policy are derived in the steady state equilibrium; and the effects of unionization are analysed on the level of employment, growth rate, welfare and on tax rate respectively. This growth rate maximizing income tax rate appears to be higher than (equal to) the competitive output share of public input in the presence (absence) of unemployment benefit. Unionisation may be good or bad for the economy in the case of Efficient bargaining model; and the nature of the effect depends on the orientation of the labour union. However, this is always bad for both employment and growth in the case of a ‘Right to Manage’ model