Equilibrium unemployment with credit and labour market imperfections

Erkki Koskela and Rune Stenbacka

No 5/2001, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: We study the role of labour and credit market imperfections for the determination of equilibrium unemployment.In the credit market loan contracts are negotiated between financiers and firms, both possessing bargaining power, while the firms and organized labour bargain over the base wage.The sequential labour and credit market negotiations are assumed to take place conditional on the firm having committed itself to use performance related profit sharing in addition to the negotiated base wage.It is shown that in the presence of profit sharing intensified credit market competition will raise equilibrium unemployment, because it induces wage-enhancing effects causing an increase in the outside option available to union members.Equilibrium unemployment is also an increasing function of firms' bankruptcy risks.It is, however, independent of the degree credit market imperfections if the compensation system is unrelated to firms' profits or if there is a monopoly union in the labour market.

Keywords: wage and loan bargaining; compensation systems; equilibrium unemployment (search for similar items in EconPapers)
Date: 2001
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Working Paper: Equilibrium Unemployment with Credit and Labour Market Imperfections (2001)
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