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Unions, Innovation and Cross-Country Wage Inequality

Angus Chu (), Guido Cozzi () and Yuichi Furukawa ()

MPRA Paper from University Library of Munich, Germany

Abstract: This study explores the macroeconomic effects of labor unions in a two-country R&D-based growth model in which the market size of each country determines the incentives for innovation. We find that an increase in the bargaining power of a wage-oriented union leads to a decrease in employment in the domestic economy. This result has two important implications on innovation. First, it reduces the rates of innovation and economic growth. Second, it causes innovation to be directed to the foreign economy, which in turn causes a negative effect on domestic wages relative to foreign wages in the long run. We also derive welfare implications and calibrate our model to data in the US and the UK to quantify the effects of labor unions on social welfare and wage inequality across countries. Our calibrated model is able to explain about half of the decrease in relative wage between the US and the UK from 1980 to 2007. Furthermore, the decrease in unions' bargaining power leads to quantitatively significant welfare gains in the two countries.

Keywords: economic growth; R&D; labor unions; wage inequality (search for similar items in EconPapers)
JEL-codes: E24 J51 O30 O43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ino and nep-mac
Date: 2015-12
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Journal Article: Unions, innovation and cross-country wage inequality (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:68447

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