Wage pacts and economic growth

Purpose The purpose of this paper is to theoretically investigate the impact of wage pacts on economic growth. Design/methodology/approach This paper presents an innovation driven endogenous growth model, where firms and unions bargain over wages. Findings Finds that the degree of centralization of the bargaining structure plays a crucial rule for economic performance. Central bargaining, which incorporates the leapfrogging externality incorporated in firm‐level bargaining, will yield lower rates of unemployment for a given rate of economic growth. The increase in labor resources will in turn also yield faster growth rates in a corporatist economy. Indeed, when unions focus on issues other than short term wage increases, they may even outperform the non‐unionized economy, as they can internalize the knowledge externality through long‐term wage moderation pacts. Research limitations/implications The paper is theoretical with some anecdotal evidence, and lacks thorough empirical testing. Practical implications There are strong implications for economic policy, suggesting the promotion of wage pacts. Before implementation, prior empirical conformation of the results is required. Originality/value This is the first paper that demonstrates under which conditions unions can promote economic growth and reduce unemployment through long‐term wage pacts.