Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

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

Pehr-Johan Norbäck ()
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Pehr-Johan Norbäck: The Research Institute of Industrial Economics, Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

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

JEL-codes: F12; J50; O11

23 pages, First version: January 19, 1999. Revised: January 10, 2001. Earlier revisions: October 5, 2000.

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