GROWTH, UNEMPLOYMENT AND THE WAGE SETTING PROCESS.



1 Introduccion

The prevailing paradigm about the long run relationship between growth an
unemployment in the seventies comes from two independent models. On the one
hand, the Friedman-Phelps model which says that the economy in the long run
converges to a natural rate of unemployment which depends on the institutional
characteristics of the labour market. On the other hand, any of the growth
models of the decade (Solow, Infinite Horizon or OLG) with perfect competition
in the labor market, which say that, with an exogenous constant rate of labour
aumenting technological progress, the long run rate of growth depends on the
the exogenous rate of population growth and the exogenous rate of technological
progress. According to these results one may think that there is no relationship
between growth and unemployment in the long run, but this is an unwarranted
conclusion because these are two different models and the definition of long run
is also different.

In the eighties and the nineties this relationship has been analyzed by difer-
ent authors. Pissarides [8] in chapter 2 presents a model with matching frictions
in the labour market where growth, via the creation of more vacancies, has a
long run positive effect on employment (the capitalization effect), that is, a neg-
ative relationship between growth and unemployment in the long run. Aghion
and Howitt [1] add to this positive effect of growth on employment a nega-
tive one arguing that growth, via the increase in productivity, will increase the
inflow rate into unemployment (the reallocation effect). Considering together
these two effects they obtain a hump-shaped relationship between growth and
unemployment in the long run.

Bean and Pissarides [2], using an OLG model with also a labour market
with matching frictions and with a technology capable of yielding endogenous
unbounded growth (Romer [10]), analyze how the rate of growth and the rate
of unemployment in the short run change when there is a change in hiring costs,
in taxes, in the propensity to consume and in the relative bargaining strengh of
workers. This model ignores these causality effects of growth on unemployment
and growth and unemployment are jointly determined endogenous variables that
depend on exogenous variables. The results are that a reduction in hiring cost
and a decreases in taxes implies more growth and less unemployment, an increase
in the propensity to consume lowers the rate of growth and leaves unemployment
unaffected and an increase in the bargaining strenght of workers has ambiguos
effect on growth and unemployment. Using the same technology but in a union-
monopoly model (McDonald and Solow [6]) Daveri and Tabellini [3] get that
an increase in labour taxes implies less growth and more unemployment.

In the model presented in this paper we also follow the union-monopoly
model but, different from the Daveri and Tabellini’s paper, we endogenize the



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