International Labor Union Policy and Growth with Creative Destruction*

Abstract

A multi-economy Schumpeterian growth model is constructed. Economies are interdependent through technology transfer. Households can stay as workers or become researchers at some cost. Workers are employed in production and researchers in R&D. Workers are unionized and union power depends on the government's protection. The main findings are as follows. If international technological dependence increases, then workers' wages, the growth rate, and the level of welfare fall. The international coordination of labor union policy raises workers' wages and promotes growth and welfare.

Unions, innovation and cross-country wage inequality

“…Lemma 2 shows that the decrease in employment also reduces economic growth in the long run. Together with the decrease in N h t =N f t , steady-state welfare in the Home country decreases, but the welfare e¤ect in the Foreign country is ambiguous due to the opposing e¤ects of g and N f 0 on U f in (38). We summarize these results in Proposition 3.…”

“…h leads to a decrease in relative employment l h =l f , which in turn increases relative wage w h t =w f t across countries in the short run (i.e., for a given N h t =N f t ) as shown in (31). This short-run increase in relative wage is partly due to the direct e¤ect of the decrease in relative employment and partly due to an indirect e¤ect via the increase in relative price P h also reduces steady-state welfare in the Home country due to the lower growth rate, but the welfare e¤ect in the Foreign country is ambiguous due to the opposing e¤ects of g and N f 0 on U f in (38). We summarize these results in Proposition 2.…”

“…Subsequent studies, such as Palokangas (2000Palokangas ( , 2004Palokangas ( , 2005, Boone (2000) and Ji et al (2015), also analyze the e¤ects of labor unions in R&D-based growth models. 6 Palokangas (1996Palokangas ( , 2000Palokangas ( , 2004Palokangas ( , 2005 …nds that increasing the bargaining power of labor union serves to increase economic growth, whereas Boone (2000) …nds that labor union dampens economic growth. Ji et al (2015) …nd that labor union has both a negative growth e¤ect via unemployment and a positive growth e¤ect via endogenous market structure, and these two e¤ects exactly o¤set each other leaving an overall neutral e¤ect on growth.…”

“…Our study complements their interesting analysis by exploring the e¤ects of labor unions in an open-economy R&D-based growth model. 8 An exception is Palokangas (2005), who explores an open economy with unions and international R&D spillovers; however, he does not consider the direction of innovation and wage inequality across countries. 9 See for example Acemoglu (1998Acemoglu ( , 2002 …”

“…See Appendix A. Equation (38) shows that welfare U j is increasing in the equilibrium growth rate g, which is given by (36), and in the balanced-growth level of technology N j 0 , which is determined by (34). In this model, when the economy is on a transition path, new varieties are created only for one country until the economy reaches the new balanced growth path along which N 26 If we consider an alternative innovation process in which labor is the factor input for R&D, then the relationship between employment and economic growth could be di¤erent.…”