Research Discussion Papers, Bank of Finland
No 5/2001:
Equilibrium unemployment with credit and labour market imperfections
Erkki Koskela and Rune Stenbacka
Abstract: We study the role of labour and credit market
imperfections in the determination of equilibrium unemployment. In the
credit market, loan contracts are negotiated between financiers and firms,
both of which have bargaining power, while firms and organized labour
bargain over the base wage. The sequential labour and credit market
negotiations are assumed to take place conditional on the firm having
committed to the use performance-related profit sharing in addition to the
negotiated base wage. It is shown that, in the presence of profit sharing,
intensified credit market competition will raise equilibrium unemployment,
because it induces wage-enhancing effects that cause an increase in the
outside option available to union members. Equilibrium unemployment, which
is also an increasing function of firms’ bankruptcy risks, is however
independent of the extent of credit market imperfection, provided that the
compensation system is unrelated to firms’ profits or that there is a
monopoly union in the labour market.
Keywords: wage and loan bargaining; compensation systems; equilibrium unemployment; (follow links to similar papers)
JEL-Codes: G32; J41; J51; (follow links to similar papers)
38 pages, March 16, 2001
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