Unemployment,Growth, and Trade Unions

This paper develops a two‐sector endogenous growth model with a dual labor market caused by the operation of trade unions. Trade unions strive for the extraction of rents from the growth generating imperfectly competitive primary sector. This union behavior results in a non‐competitive wage differential between the primary and secondary (perfectly competitive) sector. How the relationship between growth and unemployment depends on the institutional details of the labor market is analyzed. In general, growth and unemployment are intimately related for two reasons. Unemployment affects the scale of operation of the economy and thereby the growth rate. Growth affects inter‐temporal decisions of workers about where to allocate on the labor market once they are laid off, and thereby it affects equilibrium unemployment.