Wage pacts and economic growth

Purpose - The purpose of this paper is to theoretically investigate the impact of wage pacts on economic growth. Design/methodology/approach - This paper presents an innovation driven endogenous growth model, where firms and unions bargain over wages. Findings - Finds that the degree of centralization of the bargaining structure plays a crucial rule for economic performance. Central bargaining, which incorporates the leapfrogging externality incorporated in firm-level bargaining, will yield lower rates of unemployment for a given rate of economic growth. The increase in labor resources will in turn also yield faster growth rates in a corporatist economy. Indeed, when unions focus on issues other than short term wage increases, they may even outperform the non-unionized economy, as they can internalize the knowledge externality through long-term wage moderation pacts. Research limitations/implications - The paper is theoretical with some anecdotal evidence, and lacks thorough empirical testing. Practical implications - There are strong implications for economic policy, suggesting the promotion of wage pacts. Before implementation, prior empirical conformation of the results is required. Originality/value - This is the first paper that demonstrates under which conditions unions can promote economic growth and reduce unemployment through long-term wage pacts.