GROWTH, UNEMPLOYMENT AND THE WAGE SETTING PROCESS.

of population growth and the rate of productivity growth. The rate of unem-
ployment is constant along time. This constant rate of unemployment depends
on how the government cares about the welfare of employed (or unemployed)
workers and on the parameter of the production function. We can conclude in
this case that there is no relationship between growth and unemployment in the
long run.

If the government sets both the unemployment benefit and the tax rate
to employed workers and workers take into account only previous wages when
setting the wage, the rate of growth of real wages is constant and depends
on the parameter of the production function. If it is smaller than the rate of
productivity growth, the rates of growth of output and employment increase
with time and, after some time, the rate of unemployment decreases.

Finally, when both previous wages and the present unemployment b enefit
are taken into account when setting the wage, and the weight of previous wages
is small the economy converges to a long run rate of unemployment. The long
run rate of growth depends on the rate of population growth and the rate of
productivity growth. The long run rate of unemployment depends on the weight
of previous wages when setting the wage, on how the government cares about
the welfare of unemployed workers and on the rate of productivity growth. In
this case the higher the rate of productivity growth, the higher the growth rate
and the lower the unemployment rate in the long run. Last result means that
any government policy that increases productivity will imply more growth and
less unemployment.

Summarizing, we can not conclude that there is no relationship between
growth and unemployment in the long-run because this only happens when the
government sets both the unemployment benefit and the tax rate to employed
workers and workers take into account only the unemployment benefit of the
period when setting the wage. If it turns out that past wages are a relevant
variable in the wage setting process the higher the rate of growth of productivity
the higher the rate of growth and the lower the rate of unemployment in the long
run, which implies a negative relationship between growth and unemployment.
Nevertheless this relationship is weak because growth and unemployment in the
long run are also affected indep endently by many other exogenous variables.

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