DP3230 | Endogenous Growth Fluctuations in Unionised Economy with Productive Externalities

Publication Date

20/02/2002

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Abstract

We discuss the effects of unions in the labour market on steady-state multiplicity and welfare, and on the occurrence of local indeterminacy, local bifurcations and (stochastic and deterministic) endogenous fluctuations driven by self-fulfilling expectations. We consider an overlapping generations economy with capital externalities and we focus on underemployment equilibria. We find that for wide regions in the parameter space, including an arbitrarily small degree of externalities and a Cobb-Douglas technology, unions increase steady state employment and welfare, and local indeterminacy (sunspots) emerges. Our results show that the role of unions in shaping local dynamics depends on technology (externalities and factor's substitutability). Indeed, if capital externalities take intermediate values, local indeterminacy requires implausible low degrees of factor substitutability when unions are sufficiently strong. We also find that Hopf bifurcations and local deterministic endogenous fluctuations generically occur, with an elasticity of factor substitution the closest to 1 the lower the unions' bargaining power. Moreover, transcritical bifurcations generically occur for lower levels of the elasticity of factor substitution, implying the existence of two close steady states, one being a saddle and the other being indeterminate. With a CES, however, technology multiplicity of steady states is only possible in the presence of unions.