Growth and employment differentials under alternative wage-setting institutions and integrated capital markets

This paper compares the effects of different labor market institutions on economic growth and employment. In the general equilibrium model here presented, a mechanism causing persistence (on-the-job training) interacts with the presence of strategic complementary between investors’ decisions on capital accumulation and workers’ decisions on labor-market participation. Within this framework, i) structurally and institutionally similar economies preserve forever their differences in levels of output and employment, ii) the steady-state growth rate is higher in economies with competitive wage determination than it is in unionized economies, and iii) this growth differential becomes larger when the capital market is integrated.