Union games: technological unemployment (Q2580965)

The aim of this paper is to investigate a novel approach for modelling the involuntary unemployment, proposing a source of unemployment different from those proposed in the literature. In particular, as source of unemployment, there are is considered the suppliers of factors engaged in strategic behaviour and manipulation of prices. The paper considers a model of production economy in which the number of factors is finite and can be used only to produce a single consumption commodity using a technology that exhibits constant returns to scale. Total initial endowments of factors are controlled by a finite number of different unions. These unions behave strategically by supplying amounts of inputs that may be less than the initial endowments of factors, with the objective of maximizing the total income of the factors under their control. In the proposed game, each strategy profile defines a new economy, which is equal to the original one except for the initial amount of inputs given by the corresponding strategy profile. In the first stage of the game, unions declare the amount of inputs to be supplied in the production process. In the second stage, the Walrasian mechanism generates the price vector for the economy created by the unions. This allows to associate with the production economy a game called ``union game'', whose Nash equilibria are denoted as ``union equilibria''. In this framework, the authors show that the conditions under which union equilibria lead to unemployment of factors are of technological nature. For unemployment to exist, a certain degree of complementarity of factors in the production function is required. Without the complementarity of factors, the Walrasian equilibrium with perfect disclosure of total endowments is the solution of the proposed economical game model. Unemployment of factors arises as a consequence of owner awareness on the impact that a drop of the supply of a factor can have on prices. Thus, the technology and the awareness of unions about the impact on the prices of undercutting factor supplies are proved to be the two key ingredients of the proposed model in this paper. The main result of the paper is stating and proving a limit theorem, showing that for the considered model of production economy, the incentive of every union to behave strategically diminishes when the size of the union becomes smaller. This implies that, as the market power to manipulate prices decreases, the corresponding sequence of union equilibria converges to the competitive situation of full employment of factors. An important consequence of the discussed model is that for each economy with unemployment of factors generated by a union game, there exists a competitive economy with no unemployment, having exactly the same prices and the same utilization of inputs. A selection of examples illustrates the results, showing that the degree of complementarity and substitution among factors (including technology and price manipulation) is one of the main causes for the rate of unemployment of factors.