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In this paper, unemployment, growth, and income inequality are interdependent and endogenously determined in a unified model of a trade union. Analytically, we show that the effective labor force exhibits an intensive margin response, in the sense that in response to higher unionization the number of employed workers decreases, but each individual employed worker provides more working hours. This intensive margin response leads to the possibility of the coexistence of high unemployment and high growth. Moreover, unionization gives rise to an ambiguous effect on income inequality, whereas it has an unambiguously positive effect on the labor income share and growth rate. Our numerical study shows that the elasticity of substitution between labor and capital plays an important role in governing the steady-state consequences and affecting the impact of (de-) unionization. These results provide not only a plausible explanation of the empirical evidence, but also a reconciliation for the disparity in the empirical findings.

By shedding light on market imperfections and the congestion of public goods, we show that free entry in a market equilibrium will lead to excessive entry relative to the social optimum. Moreover, by specifying a generalized congestion function, it is also shown that different fiscal policies, including labor income tax, capital income tax and government expenditure, play a distinct role in terms of remedying market distortions. Specifically, optimal income taxes decrease with the degree of market imperfections in order to remove the monopoly inefficiency, while they increase with the degree of congestion in order to remedy the adverse externality caused by congestion distortion. Since a higher degree of increasing returns to an expansion in the variety of intermediate goods is found to intensify the congestion effect of government infrastructure expenditure, the optimal rule of government expenditure proposed by Barro (1990) should be modified. Copyright The editors of the "Scandinavian Journal of Economics" 2007 .

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In this paper, we develop a heterogeneous‐agent, endogenous growth model of a unionized economy with distinct progressive tax schedules on labor and capital income. With time preference heterogeneity, the effective labor force, balanced growth, and income inequality are endogenously determined, and these interact with each other. A reduction in the degree of progressive labor tax yields a “double‐dividend” in terms of reducing income inequality and boosting economic growth, while capital income progressivity displays the usual growth–inequality trade‐off. Particularly, the double‐dividend effect becomes more pronounced when unionization is declined or trade unions become more wage‐oriented, leading to the so‐called “Cheshire cat” phenomenon.