DP4679 | Indeterminacy in a Finance Constrained Unionized Economy

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We introduce labour market imperfections (i.e. unions and the existence of a wage floor) in a finance-constrained monetary economy with heterogenous agents and increasing returns to scale due to labour and capital productive externalities. We find that indeterminacy emerges for empirically plausible values of the parameters, compatible with a downward-sloping marginal productivity of labour curve. Moreover, we show that indeterminacy and Hopf bifurcations are possible with an (arbitrarily) small degree of (total) externalities provided that the share of labour externalities exceed a lower bound, which decreases with union power. We also find that unions increase simultaneously steady-state employment, capital accumulation and welfare if the marginal productivity of labour is decreasing in employment.