Unions, growth and unemployment

Abstract

We extend the standard quality-ladder model with heterogeneous workers by including efficiency wages and unions. We find that higher union bargaining power leads to a negative relationship between growth and unemployment. An increase in the supply of human capital, however, on the one hand induces firms to substitute high-skilled labour for jobs previously performed by low-skilled individu- als and on the other hand, increases the demand for low-skilled labour as their productivity rises due to the higher skill-intensity. Depending on which effect dominates, either a positive or negative relationship between the growth and unemployment rates results.