Bargaining over Productivity and Wages when Technical Change is Induced: Implications for Growth, Distribution and Employment

In a simple one-sector economy operating at full capacity, workers and firms bargain a la Nash (1950) over wages and productivity gains taking into account the trade-offs faced by firms in choosing factor-augmenting technolo- gies. The aggregate environment that arises from self-interested behavior by economic agents, thus producing 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 tech- nical change, a constant rate of employment of labor, and constant input shares. The type of oscillations predicted by the model is qualitatively consis- tent with the available data on the United States (1963-2003), replicates the dynamics found in earlier models of growth cycles such as Goodwin (1967), Shah and Desai (1981), van der Ploeg (1987), and is verified numerically in simulations. Institutional change, as captured by variations in workers’ bar- gaining power, has a positive effect on the rate of growth of output per worker but a negative effect on employment. Economic policy can also affect the growth and distribution pattern through changes in unemployment compen- sations, which also have a positive impact on labor productivity growth but a negative impact on employment.