This paper analyses the link between employment and capital accumulation in unionised labour markets by using a dynamic monopoly union model. The role of wage setting is also explored within the above context. The empirical analysis is based on annual data from the manufacturing sector of five European countries (France, Greece, Italy, Portugal and Spain). It verifies that capital accumulation has a positive influence on employment. Concerning wages, there is evidence that, in most countries, income opportunities in the public sector play an important role in wage determination. A larger public sector crowds out private investment and employment by serving as a safety net that allows wage setters to push for higher wage demands.

This paper studies the behaviour of employment and real wages in Greek manufacturing 1954‐1993. Since employment dynamics are driven by trade union membership, wage aspirations and adjustment costs, the paper tries to identify the relative importance of these propagation mechanisms for the stylized fact of full (un)employment persistence. The empirical results suggest that adjustment costs in firms’ decision making, due to institutional and technological constraints, are the main reason for the slow response of (un)employment to changes in the economic environment.

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