DP1143 | Endogenous Distortions in Product and Labour Markets

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This paper uses the common agency approach to analyse the joint determination of product and labour market distortions in a small (developing) open economy. Capital owners and union members lobby the government on both tariffs and minimum wages, while other factors of production are not organized. The paper shows that product and labour market distortions move in the same direction in response to changes in economic and political parameters, and that their level is not modified by social pacts between capital and labour. It also shows that conditionality by foreign agencies should target product market distortions, not labour market distortions.