Scandinavian Working Papers in Economics
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Research Institute of Industrial Economics (IFN) Working Paper Series

No 520:
Cumulative Effects of Labor Market Distortions in a Developing Country

Pehr-Johan Norbäck ()

Abstract: This paper considers a small open economy with an input-output industrial structure that creates vertical linkages and multiple equilibria. An imperfect labor market is introduced by assuming unionized labor. It is shown that a deregulation of the labor market may trigger a large discontinuous expansion of industrial output, as reduced wage-costs start a circular, cumulative process in which expansions of the up-and downstream industries promote each other. Centralization of collective bargaining may, however, also be conductive to industrialization.

Keywords: Vertical linkages; Multiple equilibria; Labor unions; (follow links to similar papers)

JEL-Codes: F12; J50; O11; (follow links to similar papers)

23 pages, January 19, 1999, Revised January 10, 2001

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This paper is forthcoming as:
Norbäck, Pehr-Johan, 'Cumulative Effects of Labor Market Distortions in a Developing Country', Journal of Developing Economics.

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