Neoclassical Economic Growth and Lifetime Welfare in a Simple OLG Model with Unions

We analyse the effects of the introduction of a unionised labour market in a simple Diamond's OLG framework. Interesting findings, so far escaped closer scrutiny, emerge. Under some particular conditions about the key parameters of the model, the unionised-wage economy may perform better than the standard market-clearing wage frame as regards economic growth and the lifetime welfare. We show that wages are set by the monopolistic union as a mark-up over the (constant) unemployment benefit such as tomaximise the long-run stock of capital. Furthermore, given the union's wage, a benevolent government is able to pick up exactly a value of the unemployment bonus such as to obtain a welfare maximum. These resultsmay have important policy implications.