Wage bargaining and induced technical change in a linear economy: Model and application to the US (1963–2003) (original) (raw)

In a simple one-sector, two-class, fixed-proportions economy, wages are set through axiomatic bargainingà la Nash . As for choice of technology, firms choose the direction of factor augmentations to maximize the rate of unit cost reduction (Kennedy [14], and more recently Funk [10]). 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 . 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.