Unemployment Benefits and Employment Policies in the Presence of a Strong Trade Union: A Comparison

Abstract. The paper analyses, within a game theoretic approach, the consequences on private employment and real wages of a government policy of raising unemployment benefits following a fall in employment. The effects of such a policy are then compared with those arising from a more conventional demand policy. Under the policy regime described the reaction of the unions will cause, when the economy is hit by a negative shock on employment, a tendency for the real wage to rise and for private employment to decrease further. As far as the comparison of such policy with a policy of direct employment by the government is concerned we have reached the following conclusions. A policy based on unemployment benefit will give rise to a smaller increase in the real wage than a policy based on public employment if the change in the marginal utility of being employed due to change in the unemployment benefit is smaller than the utility that the union will obtain from an extra employed person. Moreover it appears that a policy based on unemployment benefits has a smaller negative effect on private employment, than a policy based on direct employment. if such a policy is adopted just after an employment benefits represent also a subsidy to the firms. We have shown that the effects on the real wage of the Policy rule considered are in this case stronger. The effects on employment depend on the relative strength of the union reaction and of the policy's supply side effects.