(UCP-FCEE) and IZAWe incorporate imperfectly insured unemployment in the finance constrained economy proposed by Woodford (1986), by introducing unions and unemployment benefits financed by labor taxation. We show that this simple extension of the Woodford model changes drastically its stability conditions and local dynamics around the steady state. In fact, in contrast to related models in the literature, we find that, under constant returns to scale in production: (i) indeterminacy always prevails in the case of a unitary elasticity of substitution between capital and labor and (ii) flip and Hopf bifurcations occur for empirically credible elasticities of substitution between capital and labor, so that a rich set of dynamics may emerge at "realistic" parameters' values.

We consider a constant returns to scale, one sector economy with segmented asset markets of the Woodford (1986) type. We analyze the role of public spending, financed by labor income and consumption taxation, on the emergence of indeterminacy. We find that what is relevant for indeterminacy is the variability of the distortion introduced by government intervention. We further discuss the results in terms of the level of the tax rate, its variability with respect to the tax base and the degree of externalities in preferences due to the existence of a public good. We show that the degree of public spending externalities affects the combinations between the tax rate and its variability under which indeterminacy occurs. Moreover, in contrast to previous results, we find that consumption taxes can lead to local indeterminacy when asset markets are segmented.

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Unions, Firing Costs and Unemployment Leonor Modesto D I S C U S S I O N P A P E R S E R I E S ABSTRACT Unions, Firing Costs and UnemploymentIn this paper we conduct an analysis of the effects of firing costs in models that consider simultaneously worker heterogeneity, imperfect information on their productivity and union power. We consider an OLG model where heterogeneous workers participate in the labour market both when young and old. Each generation of workers is represented by its own union. Unions set wages unilaterally taking into account firm behavior. Firms are atomistic and choose employment treating wages parametrically. There is imperfect information about worker productivity. We find that at given wages firing costs increase youth unemployment and decrease old age unemployment. However, once we take the wage response into account, we find that firing costs increase both youth and old age unemployment. This happens because unions react strategically, and respond to higher firing costs. Indeed, when firing costs increase, firms refrain from hiring youths since, if a young worker turns out to be inadequate, it will be more costly to fire him. The union, knowing this, reduces the wage of young workers in order to attempt to increase their employment prospects. However, despite this cut youth unemployment still increases with firing costs. In the second period, on the contrary, higher firing costs give the union more power. In fact, knowing that firms will be less likely to cut their labour force when firing costs are high, the union increases the wage of old workers, and, therefore, old age unemployment increases.JEL Classification: D83, E24, J65

We discuss the effects of unions on steady-state multiplicity and welfare, and on the existence of endogenous fluctuations. We consider an OG economy with productive capital externalities and we focus on underemployment equilibria. We find that for wide regions in the parameter space, including an arbitrarily small degree of externalities and a Cobb-Douglas technology, unions increase steady state employment and welfare, and local indeterminacy (sunspots) emerges. Moreover with a CES technology multiplicity of steady states is only possible in the presence of unions. Our results also show that the role of unions in shaping local dynamics and bifurcations depends on technology (externalities and factor’s substitutability). Copyright Springer-Verlag Berlin/Heidelberg 2005Unions, Local indeterminacy and bifurcations, Steady-state welfare, Capital externalities.,