behaviour of the government which allows to study a comparative static ques-
tion not analyzed in the literature: how a government that cares more about
employed workers affects the equilibrium of the economy and, consequently, un-
der which conditions there is lower unemployment with a higher unemployment
benefit. On the other hand, we do not take into account the aggregate capital
externality of the Romer’s model (Romer [10]) and we allow for a constant
exogenous rate of productivity in order to clarify its effect on the long run rate
of growth and unemployment. Finally, we introduce the possibility of taking
into account past wages in the wage setting process and, as we will see, this has
a significative effect on the long run rate of growth and unemployment. This is
one of the main contributions of this paper. This purpouse has determined our
option for the union-monopoly model instead of the matching model, more suit-
able for analizing the effect of the destruction of jobs due to the technological
progress on growth and unemployment.
That a higher exogenous unemployment benefit is associated with more un-
employment is one of the standard results of partial equilibrium static models
with unions (see Oswald [7] and Layard, Nickell and Jackman [5]). Sorolla-i-
Amat [11] presents a general equilibrium static model where a higher exogenous
unemployment benefit implies more unemployment. In Sorolla-i-Amat [12] the
same result is presented using an infinite horizon model. In the present paper
the unemployment benefit is endogenous. On the one hand, it is true that, if
the government increases the unemployment benefit, the union asks for a higher
wage and there is more unemployment, but, on the other hand, if there is less
unemployment, then the government can pay a higher unemployment b enefit
and the final relationship depends on both effects.
There are other papers that study similar questions using dynamic models
with wage setting. Przeworski and Wallerstein [9] and Sorolla-i-Amat [12]
analyze with an infinite horizon model what is the effect of a more proworker
government on the unemployment level. The main difference between both
papers is that in Sorolla-i-Amat’s paper the economy is a market economy.
The paper is organized as follows: in section 2 we present the individual
agents: firms and consumers and we define the market equilibrium for a given
wage. Section 3 presents the collective agents: the union and the government.
Section 4 defines the Nash equilibrium of the economy and shows under which
conditions a higher unemployment benefit is associated with a lower unemploy-
ment rate. Section 5 analyzes the behaviour of wages, growth and unemploy-
ment in two special cases: In the first case, the union takes into account only
previous wages in the wage setting process. In the second case only present vari-
ables are considered by the union. Section 6 studies the long run rate of growth
and unemployment when the union weights the previous wage and the present
unemployment benefit when setting the wage. Last section is a summary of the