Wage Bargaining and Induced Technical Change in a Linear Economy : Model and Application to the US, 1963-2003

In a simple one-sector, two-class, fixed-proportions economy, wages are set through (generalized) axiomatic bargaining a` la Nash (1950). As for choice of technology, firms choose the direction of factor augmentations to maxi- mize the rate of unit cost reduction (Kennedy, 1964, and more recently Funk, 2002). The aggregate environment resulting by self-interested decisions made by economic agents 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 matches the available data on the United States (1963-2003). Finally, institutional change, as captured by variations in workers' bargaining power, has a positive effect on the rate of output growth but a negative effect on employment