Doctoral Defence: “Studies on Public Policy with Collective Bargaining”

May 30, 2022

On June 3rd, Lic.Soc.Sc. Michael Hohenthal will defend his doctoral thesis “Studies on Public Policy with Collective Bargaining”. Hohenthal’s dissertation includes four essays. Each essay deals with macroeconomic issues, which all have an impact on the effectiveness and efficiency of public policy.

The first essay examines the effects of tax and public spending reforms in a small open economy with collective bargaining and imperfect capital markets. Consumption, labor and capital income as well as profit are taxed to finance the supply of a public good. Calibrating the model using Finnish data shows that a marginal increase of government spending on the public good harms welfare if it is financed by a higher consumption or capital income tax. A cost neutral shift of taxation from labor income to consumption increases welfare.

The second essay examines optimal taxation with efficient bargaining (EB) or right-to-manage bargaining (RtM). The labor contracts are called credible, if there is such commitment technology available that they cannot be revised just after investment, otherwise they are called non-credible. The optimal profit tax is negative with non-credible contracts but otherwise it is zero. The optimal labor income tax is always positive with EB but zero with RtM. When EB is applied, the optimal labor income tax is higher with credible than with non-credible contracts.

The third essay examines the effects of reforms in collective bargaining in a two-country model with congestion and footloose capital. Both countries are initially subject to RtM. Replacing RtM with EB at home or decreasing domestic union power attracts firms from abroad. Then, at home, wages decrease, workers remaining employed or unemployed lose, while firm-owners and formerly unemployed workers getting a job gain. Abroad, congestion decreases and wages increase, firm owners along with workers remaining employed or unemployed gain, but the workers losing their job suffer.

The fourth essay examines the effects of labor market reforms in an economy with collective bargaining, efficiency-improving R&D and the indexation of unemployment benefits to wages and labor productivity. Replacing RtM with EB, weakening union power or reducing the weight of wages in the indexation of unemployment benefits decreases wages but increases employment and R&D, increasing economic growth. Then, workers remaining employed lose when the negative income effect dominates over the positive growth effect. In that case, if the weight of wages in indexation is high enough, workers remaining unemployed also lose. Investors and unemployed workers getting a job benefit.