# Bargaining over productivity and wages when technical change is induced: implications for growth, distribution, and employment

- 335 Downloads
- 5 Citations

## Abstract

I study a model of growth and income distribution in which workers and firms bargain *à la* Nash (Econometrica 18(2):155–162, 1950) over wages and productivity gains, taking into account the trade-offs faced by firms in choosing factor-augmenting technologies. The aggregate environment resulting from self-interested, objective function-maximizing decision rules on wages, productivity gains, savings and investment, is described by a two-dimensional dynamical system in the employment rate and output/capital ratio. The economy converges cyclically to a long-run equilibrium involving a Harrod-neutral profile of technical change, a constant rate of employment of labor, and constant input shares. The type of oscillations predicted by the model is qualitatively consistent with the available data on the United States (1963–2003), replicates the dynamics found in earlier models of growth cycles such as Goodwin (A growth cycle, in C.H. Feinstein (ed). Socialism, Capitalism and Economic Growth. Cambridge University Press, Cambridge 1967. Cambridge University Press, Cambridge, 1967); Shah and Desai (Econ J 91:1006–1010, 1981); van der Ploeg (J Macroecon 9:1–12, 1987); Flaschel (J Econ: Zeitschrift für Nationalökonomie 44:63–69, 1984) and Sportelli (J Econ: Zeitschrift für Nationalökonomie 61(1):35–64, 1995), and can be verified numerically in simulations. Institutional change, as captured by variations in workers’ bargaining power, has a positive effect on the long-run rate of growth of output per worker but a negative effect on long-run employment. Economic policy can also affect the growth and distribution pattern through changes in the unemployment compensation, which also have a positive long-run impact on labor productivity growth but a negative long-run impact on employment. In both cases, employment can overshoot its new equilibrium value along the transitional dynamics.

## Keywords

Goodwin growth cycle Bargaining Induced technical change Factor shares Employment## JEL Classification

E24 E25 J52 O31## Notes

### Acknowledgments

I thank Rudi von Arnim, Guido Cozzi, Peter Flaschel, Michalis Nikiforos, Christian Proaño, Codrina Rada, Rick van der Ploeg, Peter Skott, Luca Zamparelli, participants to the 2010 Eastern Economic Association Meetings, and two anonymous referees for extremely valuable comments and suggestions. I am most indebted to Duncan Foley for his guidance and constructive criticism.

## References

- Abowd J, Lemieux T (1993) The effect of product market competition on collective bargaining agreements: the case of foreign competition in Canada. Q J Econ 108:983–1004CrossRefGoogle Scholar
- Acemoglu D (2003) Labor and capital augmenting technical change. J Eur Econ Assoc 1:1–37CrossRefGoogle Scholar
- Acemoglu D (2009) Introduction to modern economic growth. Princeton University Press, PrincetonGoogle Scholar
- Arrow K (1970) The technology factor in international trade. National Bureau of Economic Research, New YorkGoogle Scholar
- Barbosa-Filho NH, Taylor Lance (2007) Distributive and demand cycles in the US economy—a structuralist Goodwin model. Metroeconomica 57:389–411CrossRefGoogle Scholar
- Binmore K, Rubinstein A, Wolinsky A (1986) The Nash bargaining solution in economic modelling. Rand J Econ 17:176–188CrossRefGoogle Scholar
- Blanchflower D, Oswald A (1990) The wage curve. Scand J Econ 92(2):215–235CrossRefGoogle Scholar
- Blanchflower D, Oswald A, Sanfrey P (1996) Wages, profits and rent sharing. Q J Econ 111 1:227–251CrossRefGoogle Scholar
- Bowles S (1985) The production process in a competitive economy: Walrasian, Neo-Hobbesian, and Marxian models. Am Econ Rev 75(1):16–36Google Scholar
- Bowles S (2004) Microeconomics. Behavior, institutions, and evolution. Princeton University Press, PrincetonGoogle Scholar
- Bowles S, Kendrick D (1970) Notes and problems in microeconomic theory. Markham Publishing Company, ChicagoGoogle Scholar
- Bureau of Labor Statistics (2009a) Unemployment Rate—Civilian Labor Force—LNS14000000. http://www.bls.gov/data
- Bureau of Labor Statistics (2009b) Economics new release—Union Members Summary. http://www.bls.gov/news.release/union2.nr0.htm
- Davis SJ, Haltiwanger JC, Schuh S (1997) Job creation and job destruction. MIT Press, CambridgeGoogle Scholar
- Drandakis EM, Phelps E (1965) A model of induced invention, growth and distribution. Econ J 76(304):823–840CrossRefGoogle Scholar
- Dutt AK (1997) Equilibrium, path dependence and hysteresis in post-Keynesian models. In: Arestis P, Palma G, Sawyer M (eds) Capital controversy, post-Keynesian economics and the history of economic thought: essays in honour of Geoff Harcourt. Routledge, LondonGoogle Scholar
- Extended Penn World Tables (2008). v. 3.0. http://homepage.newschool.edu/foleyd/
- Faria JR, Araujo RA (2004) An intertemporal pasinettian model with government sector. Int J Business Econ 3(3):257–268Google Scholar
- Flaschel P (1984) Some stability properties of Goodwin’s growth cycle: a critical elaboration. J Econ—Zeitschrift für Nationalökonomie 44:63–69CrossRefGoogle Scholar
- Flaschel P, Groh G (1995) The classical growth cycle: reformulation, simulation and some facts. Econ Notes 24:293–326Google Scholar
- Foley DK (2003) Endogenous technical change with externalities in a classical growth model. J Econ Behav Organ 52:167–189CrossRefGoogle Scholar
- Foley DK, Michl TR (1999) Growth and distribution. Harvard University Press, CambridgeGoogle Scholar
- Michl TR, Foley DK (2004) Social security in a classical growth model. Camb J Econ 28(1):1–20CrossRefGoogle Scholar
- Funk P (2002) Induced innovation revisited. Economica 68:155–171CrossRefGoogle Scholar
- Goodwin R (1967) A growth cycle. In: Feinstein C (ed) Socialism, capitalism, and economic growth. Cambridge University Press, CambridgeGoogle Scholar
- Harvie D (2000) Testing Goodwin: growth cycles in ten OECD countries. Camb J Econ 24:349–376CrossRefGoogle Scholar
- Julius AJ (2005) Steady-state growth and distribution with an endogenous direction of technical change. Metroeconomica 56:1CrossRefGoogle Scholar
- Julius AJ (2009) The Wage-wage-..-wage-profit relation in a multisector bargaining economy. Metroeconomica 60(3):537–559CrossRefGoogle Scholar
- Kaldor N (1961) Capital accumulation and economic growth. In: Lutz FA, Hague DC (eds) The theory of capital. St. Martins Press, New York, p 222Google Scholar
- Kamien M, Schwartz N (1969) Induced factor augmenting technological change from a microeconomic viewpoint. Econometrica 37(4):668–684CrossRefGoogle Scholar
- Kauermann G, Teuber T, Flaschel P (2008) Estimating loops and cycles using penalized splines. CEM working paper, BielefeldGoogle Scholar
- Kennedy C (1964) Induced bias in innovation and the theory of distribution. Econ J 74:541–47CrossRefGoogle Scholar
- Lavoie M (1995) The Kaleckian model of growth and distribution and its neo-Ricardian and neo-Marxian critiques. Camb J Econ 19(6):789–818Google Scholar
- Lavoie M (1996) Traverse, hysteresis and normal growth rates of capacity utilization in Kaleckian models of growth and distribution. Rev Radic Polit Econ 28(4):113–147CrossRefGoogle Scholar
- Lavoie M, Rodríguez G, Seccareccia M (2004) Similitudes and discrepancies in post-Keynesian and Marxist theories of investment: a theoretical and empirical investigation. Int Rev Appl Econ 18(2):127–149CrossRefGoogle Scholar
- Marglin S (1984) Growth, distribution and prices. Harvard University Press, CambridgeGoogle Scholar
- Michl TR (1999) Biased technical change and the aggregate production function. Int Rev Appl Econ 13Google Scholar
- Mohun S, Veneziani R (2006) Structural stability and Goodwins growth cycle. Struct Chang Econ Dyn 17:437–451CrossRefGoogle Scholar
- Nash J (1950) The bargaining problem. Econometrica 18(2):155–162CrossRefGoogle Scholar
- Nordhaus WD (1967) Essays on the theory of optimal economic growth. MIT Press, CambridgeGoogle Scholar
- Oswald AJ (1985) The economic theory of trade unions: an introductory survey. Scand J Econ 87(2):160–193CrossRefGoogle Scholar
- Piketty T, Saez E (2003) Income inequality in the United States, 1913–1998. Q J Econ 143:1–39CrossRefGoogle Scholar
- Pissarides C (2001) Equilibrium unemployment theory. MIT Press, CambridgeGoogle Scholar
- Romer P (1986) Increasing returns and long run growth. J Polit Econ 98, part II, 1002–1037Google Scholar
- Rubinstein A (1982) Perfect equilibrium in a bargaining model. Econometrica 50(1):97–109CrossRefGoogle Scholar
- Shah A, Desai M (1981) Growth cycles with induced technical change. Econ J 91:1006–1010CrossRefGoogle Scholar
- Shapiro C, Stiglitz J (1984) Equilibrium unemployment as a worker discipline device. Am Econ Rev 74(3):433–444Google Scholar
- Skott P (2010a) Growth, instability and cycles: Harrodian and Kaleckian models of accumulation and income distribution. In: Setterfield M (ed) Handbook of alternative theories of economic growth. Edward ElgarGoogle Scholar
- Skott P (2010) Theoretical and empirical shortcomings of the Kaleckian investment function. Metroeconomica. doi: 10.1111/j.1467-999X.2010.04111.x
- Spence M (1977) Entry, capacity, investment and oligopolistic pricing. Bell J Econ The RAND Corporation 8(2):534–544CrossRefGoogle Scholar
- Sportelli MC (1995) A Kolmogoroff generalized predator–prey model of Goodwin’s growth cycle. J Econ—Zeitschrift für Nationalökonomie 61(1):35–64CrossRefGoogle Scholar
- Taylor L (2004) Reconstructing macroeconomics. Harvard University Press, CambridgeGoogle Scholar
- van der Ploeg F (1987) Growth cycles, induced technical change, and perpetual conflict over the distribution of income. J Macroecon 9:1–12CrossRefGoogle Scholar
- van Reenen J (1996) The creation and capture of economic rents: wages and innovation in a panel of UK companies. Q J Econ 111(1):195–226CrossRefGoogle Scholar
- Velupillai K (1979) Some stability properties of Goodwin’s growth cycle. J Econ—Zeitschrift für Nationalökonomie 39:245–257CrossRefGoogle Scholar