Unionised labour market, efficiency wage and endogenous growth

Abstract

In this paper, we analyse the effect of unionisation on the growth of the economy in the presence of ‘Efficiency Wage Hypothesis’. We use both ‘Efficient Bargaining’ model and ‘Right to Manage’ model to solve the negotiation problem. Unionisation raises negotiated wage rate and the effort (efficiency) level of the worker. In the case of ‘efficient bargaining model’, unionisation reduces the negotiated number of workers but improves the effort level when the union is neutral in its orientation. As a result, effective employment is increased; and this leads to a rise in the growth rate and welfare level of the economy. However, in the ‘Right to manage model’ of bargaining, unionisation in the labour market raises the effort level of worker but lowers the number of workers irrespective of the orientation of the labour union; and raises effective employment, balanced growth rate and welfare level if the wage elasticity of efficiency is greater than the unemployment rate