Union, Efficiency of Labour and Endogenous Growth

by
Chandril Bhattacharyya and Manash Ranjan Gupta

Abstract:
This paper develops an endogenous growth model with human capital formation and
‘Efficiency Wage Hypothesis’ to investigate the growth effect of unionisation and to analyse
properties of optimum income tax rate in the presence of an unionised labour market and with
taxation only on labour income. ‘Efficient Bargaining’ model as well as ‘Right to Manage’
model is used to solve the negotiation problem between the labour union and the employer’s
association. In both type modelling framework, the growth effect of unionisation is
independent of its employment effect; and it depends on its net effect on worker’s efficiency.
The growth rate maximizing tax rate on labour income is different from the corresponding
welfare maximizing tax rate; and the nature of the growth effect of unionisation is different
from its welfare effect.

JEL classification: J51; O41; J31; J24; H52; H21

Keywords: Labour union; Efficiency wage hypothesis; Human capital Formation; income tax;
Endogenous growth

Chandril Bhattacharyya
Centre for Development Studies, Thiruvananthapuram.
E-mail address: chandrilbhattacharyya@gmail.com

Manash Ranjan Gupta

Economic Research Unit, Indian Statistical Institute Kolkata.
E-mail address: manashgupta@isical.ac.in