Cumulative Effects of Labor Market Distortions

This paper considers a small open economy whit an input-output industrial structure that creates vertical linkages multiple equilibria. An imperfect labor market is introduced by assuming unionized labor. It is shown that a deregulation of the labor market may trigger a large, discontinuous expansion of industrial output, as reduced wage-costs start a circular, cumulative process in which expansions of the up- and downstream industries promote each other. Centralization of collective bargaining may, however, also be conductive to industrialization.