IZA DP No. 229: Unions, Increasing Returns and Endogenous Fluctuations
published as 'Endogenous fluctuations in unionized economies with productive externalities' in: Economic Theory, 2005, 26 (3), 629-649
We analyse the implications of unions (efficient bargaining) for multiplicity of stationary states and welfare, local indeterminacy, bifurcations and endogenous fluctuations (deterministic and stochastic). We use an overlapping generations model with external increasing returns to scale, where capital is the unique asset. We find that a slight increase in unions power may increase the levels of capital, employment and the welfare of all agents at the steady state. However multiple steady states may exist. Moreover, our results show that increasing returns to scale are a necessary condition for the emergence of deterministic endogenous fluctuations. However, we find that union’s bargaining power can dramatically influence the local stability of the system. In fact, while an increase in the bargaining power of unions reduces the scope for local indeterminacy, the emergence of endogenous fluctuations, through Hopf bifurcations may become more likely when unions are present. Therefore, if the relevant trajectory exhibits endogenous fluctuations, steady state welfare is no longer the unique important element from a social point of view. In this case, whether unions are ‘good’ institutions or not may well depend on the trade off between efficiency and intergenerational equity that society is willing to take.