International Review of Economics and Finance 72 (2021) 29–44

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International Review of Economics and Finance

journal homepage: www.elsevier.com/locate/iref

Unionised labour market, environment and endogenous growth☆

Chandril Bhattacharyya a, *, Manash Ranjan Gupta b
a
Centre for Development Studies, Thiruvananthapuram, India
b
Economic Research Unit, Indian Statistical Institute, Kolkata, India

A R T I C L E I N F O A B S T R A C T

JEL classification: This paper develops an endogenous growth model where the labour market is unionised and the
J51 labour union is concerned not only about wages and employment but also about workers’ health,
Q58 safety and environmental protection. Bargaining takes place between the labour union and the
O44
firm; and, in the bargaining solution, the firm is forced to forgo a share of its output to choose a
Keywords: more environment-friendly but less productive technology. The government finances public
Labour union
abatement expenditure using proportional income tax. We analyse properties of the welfare
Environment
maximising income tax rate as well as the growth rate maximising one. We also analyse how the
Income tax
Abatement expenditure employment orientation bias in the preference structure of the labour union plays an important
Endogenous growth role to ensure a positive effect on the employment level, economic growth rate and on the level of
welfare.

1. Introduction

There exists a vast literature on endogenous growth theory; and a part of that deals with the interaction between economic growth
and environmental pollution.1 Capital accumulation and/or technological progress negatively affects the environmental quality which is
treated either as a flow variable or as a stock variable. Competitive equilibrium does not necessarily generate optimal growth in the
presence of environmental pollution; and so properties of optimal fiscal policies and of financing abatement activities are important
issues to be analysed in that part of literature. However, all these models assume competitive labour market and thus fail to analyse how
unionisation in the labour market affects growth, abatement activities and the environment.
Out of the vast literature on endogenous growth theory, only a small subset of models analyses the role of labour unions on long run
growth.2 They focus on various channels like physical capital accumulation, human capital accumulation and R&D through which

☆
This paper is a modified version of a part of the PhD thesis of Chandril Bhattacharyya, submitted to Indian Statistical Institute, Kolkata, India.
We are grateful to Prof. Chetan Ghate of Indian Statistical Institute, New Delhi, India and editor and two reviewers of this journal for their help,
comments and suggestions on an earlier version.
* Corresponding author. Centre for Development Studies, Prasanth Nagar, Medical College P.O, Ulloor, Thiruvananthapuram, 695 011, Kerala,
India.
E-mail address: chandril@cds.ac.in (C. Bhattacharyya).
1
The set includes the works of Mohtadi (1996), Bartz and Kelly (2008), Brock and Taylor (2005), Bovenberg and De Mooij (1997), Bovenberg and
Smulders (1995, 1996), Fullerton and Kim (2008), Chu and Lai (2014), Economides and Philippopoulos (2008), Greiner (2005), Gupta and Barman
(2009, 2010, 2013, 2015), Barman and Gupta (2010) etc.
2
The set includes the works of Br€auninger (2000), Adjemian et al. (2010), Lingens (2003a, 2003b), Irmen and Wigger (2002/2003), Sorensen
(1997), Palokangas (1996), Chang et al. (2007), Lai and Wang (2010), Ramos-Parreno and Sanchez-Losada (2002), Gori and Fanti (2009), Fanti and
Gori (2011), Bhattacharyya and Gupta (2015, 2016) etc.

https://doi.org/10.1016/j.iref.2020.10.005
Received 8 February 2019; Received in revised form 10 July 2020; Accepted 4 October 2020
Available online 5 November 2020
1059-0560/© 2020 Elsevier Inc. All rights reserved.
C. Bhattacharyya, M. Ranjan Gupta International Review of Economics and Finance 72 (2021) 29–44

unionisation can affect economic growth. However, this literature does not consider a union’s concern about workers’ health and safety
and about environment protection. In reality, labour unions often bargain with firms to make them spend to improve the workers’ health
and safety conditions in the workplace. Unions can put pressures on firms to use costly eco-friendly techniques of production or to
allocate resources to non-productive activities ensuring workers’ health and safety and environmental protection. So unions’ effort may
lead to an improvement of the natural environment; and this, in turn, on the one hand, lowers the problems of health hazards of the
workers and, on the other hand, motivates them to work hard lowering the marginal disutility of labour. The productive role of
environment3 on the efficiency of labour makes it important to analyse the growth effect of unionisation through the channel of
environmental protection; and the existing literature does not focus on this channel.
Various empirical works show that labour unions fight hard to protect workers’ health and safety and to improve the working
environment. Gahan (2002) and Nick (2011) show that workplace safety is an important priority of a labour union. Kawakami et al.
(2004) shows that labour unions in Asia organise training workshops to improve workers’ safety and health. Gray et al. (1998) studies
many private-sector collective bargaining agreements in which health and safety provisions frequently appear. Magane et al. (1997)
provides evidence of firms’ switching to eco-friendly production techniques due to the struggle of labour unions for health and safety.
Magane et al. (1997), Davies (1993) and Dembo et al. (1988) consider the workplace environment as a part of the broader natural
environment. The disasters of Thor Chemicals in South Africa, Union Carbide plant in Bhopal, India, Sandoz warehouse in Basel,
Switzerland, the nuclear power plant in Chernobyl, Soviet Union also support the link between global natural environmental disasters
and the presence of industrial environment problems in the workplace.
Many works show that labour unions play a direct role to protect environment. Khan et al. (2012a) presents evidence to show that
labour unions struggle for environmental protection. Khan (2010) and Khan et al. (2012b) also justify labour unions’ role to protect the
environment. Valenduc (2001) shows that labour unions in Belgium have environmental awareness projects. Stevis (2011) and Magane
et al. (1997) show that, over the last two decades, labour unions have developed their environmental agendas consistent with their
concerns about safety and health. Magane et al. (1997) also points out existence of successful alliances between labour unions and
environmental groups and of labour unions’ movement for the protection of the environment in South Africa. These empirical findings
and views clearly show that the union’s direct concerns about workers’ health and working safety and their long term concerns about
natural environment are not independent of each others. Also these findings motivate us to analyse how labour unions’ role to protect
workers’ health and safety and environmental quality affects economic growth. To the best of our knowledge, this aspect has not
received proper attention in the existing theoretical literature.
In the present paper, we develop an endogenous growth model with a unionised labour market where labour unions have direct
concerns for workers health, safety and environment. We use an ‘Efficient Bargaining’ model following McDonald and Solow (1981) to
represent the negotiation process between the firm and the union; and then incorporate this bargaining solution into a dynamic model
where endogenous growth is explained by the learning by doing effect of Arrow (1962). We want to analyse how unionisation in the
labour market affects employment, growth and welfare. We want to focus on the role of the orientation bias in the union’s preference
structure to ensure a positive effect on employment, growth and welfare. However, we do not provide any new theory of endogenous
growth in this paper.
Local governments provide municipal services; and, in less developed countries, these municipal services often take care of sani-
tation development, waste disposal, plantation of trees, supply of purified water etc. Projects designed to solve river water pollution
problems are financed by central government and/or by state governments. Government passes laws to protect environment from the
hazards of echo-tourism and bears the burden of administrative expenditure to implement these laws. The government also finances
various research projects designed to find out solutions to environmental pollution problems.
Lovei (1995) documents that, in most OECD countries, public pollution abatement service is typically delivered through local
governments. For example, in Denmark, Sweden and Finland, local governments were responsible for around 90% of total public
pollution abatement and control expenditures in the mid 1980s. This paper also mentions that both the public sector and the private
sector provide environmental services in the countries like U.S.A, U.K and France. Municipalities have invested in infrastructure
required for water supplies, sanitation, drainage, waste disposal etc. since the nineteenth century in many countries like Belgium,
Denmark, Netherlands, Japan etc.4 Lovei (1995) also documents that, in Bulgaria and Hungary, state and municipal budgets have
funded 48% and 78% of total environmental expenditure in 1993.5 Pearce and Palmer (2001) documents public spending for envi-
ronment as percent of GDP in many OECD countries during 70’s, 80’s and 90’s6. For example, in USA, this figure varies from 0.5% to
0.7% during 1972–1994; however, in Japan, this figure varies from 0.9% to 1.6% during 1975–1990. OECD (2007) report also points
out that environment protection is an important concern for many other countries. For example, Belarus and Moldova spent around
1.5% whereas Russian federation and Tajikistan spent around 2.5% of their general government expenditure to protect environment in
2005.7 There also exists a set of empirical papers analysing different aspects related to government expenditure for environment

3
Schlenker and Walker (2016), Chay and Greenstone (2003), Currie and Neidell (2005), Dockery et al. (1993) and Pope et al. (2002) empirically
show that pollution has significant adverse effect on health outcome. So good environmental quality must have a positive effect on productivity. Graff
Zivin and Neidell (2012), Adhvaryu et al. (2016) and Chang et al. (2016) empirically show that pollution has a significant negative impact on labour
productivity.
4
See pages 10, 11, 12 and 19 of Lovei (1995).
5
See table-5 on page 28 of Lovei (1995).
6
See tables A.1. and A.2. of Pearce and Palmer (2001).
7
See Fig. 12 of OECD (2007).

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C. Bhattacharyya, M. Ranjan Gupta International Review of Economics and Finance 72 (2021) 29–44

protection in different countries. The set includes the works like Bacot and Dawes (1997), Konisky and Woods (2012), Krajewski (2016),
Broietti et al. (2018), Ercolano and Romano (2018) etc.
There also exists a few dynamic models analysing properties of optimum income tax policy when income tax revenue finances the
abatement expenditure8. However, all the existing models assume competitive full employment labour market. So it is important to
analyse how optimum tax policy designed to finance public abatement expenditure is affected by unionisation in the labour market
when labour unions play a positive role to protect the environment. The present paper is an attempt to analyse both the problems in a
single model. On the one hand, it analyses the effect of unionisation in the labour market on long-run economic growth through the
channel of environmental protection; and, on the other hand, it analyses properties of an optimum income tax policy designed to finance
the public abatement expenditure. We plan to analyse these two simultaneously in the same model because union’s concern for
environment affects the tax policy of the government. Abatement expenditure is not only financed by private firms being bargained by
labour unions but also financed by the government. Taxation is the most important source of government revenue to finance government
expenditure. When firms’ expenditure and government expenditure to protect environment are highly substitutes to each others,
unions’ concern for environment must be conditional on the abatement expenditure policy of the government. A substantial abatement
expenditure made by the government may lower the union’s concern for environment and thus may induce the union to put a lower
bargaining pressure on the employers. The abatement expenditure policy of the government is always dependent on its tax policy. So we
need an integration of tax policy and union’s concern for environment in the same model.
Several interesting results emerge from the model. First, unionisation in the labour market always raises the firm’s share of forgone
output to protect the environment. Secondly, the long run growth maximising rate of income tax used to finance public abatement
expenditure varies inversely with the bargaining power of the labour union; and it is less than the welfare maximising income tax rate.
Thirdly, the high employment orientation bias in the preference structure of the labour union is sufficient to ensure the positive effect of
unionisation on the employment level, growth rate as well as on the level of welfare. These results are absent in the existing literature
because the models available in the existing literature do not focus on the positive role of labour unions to protect the environment.
The paper is organised as follows. In section 2, we describe the basic model with an ‘Efficient Bargaining’ theory. Section 3 focuses on
the growth rate maximising tax policy as well as on the welfare maximising tax policy. In section 4, we derive a sufficient condition for
the positive effect of unionisation on growth and welfare. Section 5 concludes the paper.

2. The model

2.1. Firms

The representative competitive firm produces the final good using private capital, K, and labour, L. The average economy wide stock
of private capital, K, enters into the production function as a positive externalities. The environmental quality9, E, is also treated as an
input. The Cobb-Douglas production function is given by10

b ¼ K α Lβ K 1α Eδ
Y (1)
satisfying α; β; δ 2 ð0; 1Þ and α þ β < 1 .
Here equation (1) shows the most efficient production technology; and Y b is the gross output obtained from this technology. The
existence of decreasing returns to private inputs leads to a positive profit if employers’ association owns a positive degree of bargaining
power. Following Chang et al. (2007), we assume that a fixed quantity of land is essential to set up a firm; and the total amount of land is
fixed in the economy. This fixes the number of firms to a constant even in the presence of positive profit.11 However, land being a fixed
factor is not included as an argument in the production function.
The most efficient production technology given by equation (1) is not environment friendly and generates emission at a very high
rate. The environment-friendly production technology is less productive due to the diversion of resources to non-productive environ-
mental protection activities. Lannelongue et al. (2017) finds an inverse empirical relationship between a firm’s labour productivity and
environmental management on an aggregate basis. Studies like Barbera and McConnell (1990), Gollop and Roberts (1983), Gray (1987),
Haveman and Christainsen (1981) and Norsworthy et al. (1979) empirically show that stricter environmental regulations have a sig-
nificant negative impact on firms’ productivity. Walley and Whitehead (1994) also discusses the loss of output due to a firm’s envi-
ronmental initiatives and points out that this loss is increasing with the level of firm’s initiatives. In this model, we assume that the firm
has to sacrifice a fraction of output, denoted by γ, to choose an environment-friendly technology, i.e., to finance the cost of environment
protection. γY represents the total additional cost of production using an environment friendly technology; and it is proportional to the
level of output. So γ represents the marginal cost of environment protection. A higher value of γ represents a higher degree of friendship
between the environment and technology because a higher marginal cost of environment protection represents a more environment

8
See for example Nguyen-Van and Pham (2013), Gupta and Barman (2009, 2010, 2013, 2015), Barman and Gupta (2010), Greiner (2005) etc.
9
An improvement in environmental quality leads to an improvement of health capital of workers and an increase in efficiency of public capital.
Gupta and Barman (2009, 2010, 2013, 2015), Barman and Gupta (2010) etc. emphasize on this point. For more empirical support, see footnote 3.
10
Chang et al. (2007) also assumes similar production function where average economy wide stock of capital enters as a positive externality in the
production function. However, they do not consider the productive role of environmental quality in the production process.
11
Number of firms is normalised to unity.

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C. Bhattacharyya, M. Ranjan Gupta International Review of Economics and Finance 72 (2021) 29–44

friendly technology. So the environment friendly production function, which we obtain subtracting the cost of environment protection
from the total output, is given by
1α
Y ¼ ð1  γÞK α Lβ K Eδ (1a)
b Y
Here Y is the net output corresponding to this environment friendly technology; and Y varies inversely with γ given all inputs. Y
for γ  0. This technology does not eliminate emission but lowers it; and the rate of emission varies inversely with the degree of
environment friendliness. The firm maximises profit, π , defined as
1α
π ¼ ð1  γÞK α Lβ K Eδ  wL  rK (2)
Here profit is defined as the gross output minus production cost minus environmental protection cost. w and r represent the wage rate
and rental rate on private capital respectively. Profit maximising level of output varies inversely with degree of environment friendliness
of the production technology because γ represents marginal cost of environment protection.

2.2. Capital market

The private capital market is perfectly competitive. So the supply-demand equality determines the equilibrium value of the perfectly
flexible rental rate on capital. The demand function for capital is derived from a firm’s profit maximising behaviour. The inverted
demand function is given by

1α ð1  γÞαY
r ¼ ð1  γÞαK α1 Lβ K Eδ ¼ (3)
K

2.3. Environment

Following Greiner (2005), we consider environmental quality, E, as a flow variable.12 Public abatement expenditure incurred by the
government can improve environmental quality; and this expenditure is financed by revenue collected from a proportional tax on in-
come.13 Entire tax revenue is spent to do this abatement activity.14 However, due to the bargaining power of the labour union, firms are
pressurised to choose environment-friendly technology; and thus firms bear a part of the cost of environment protection. Environment
quality is considered to be an increasing function of the relative abatement performance which is defined as the total abatement
expenditure per unit of total emission generated by the environment-friendly production process. The expenditure made by firms to take
care of workers’ health and safety and the government expenditure made to improve natural environment are combined under a
common umbrella; and this is called total abatement expenditure. Since expenditure is a flow variable we consider environmental
quality as a flow variable. The environmental quality function we introduce in this model is given by

logðEÞ ¼ μLogðAÞ  μLogðPÞ (4)

where A represents effective abatement expenditure and P represents total emission generated by the environment friendly production
process.

P ¼ xYð1  γÞ

where x is the constant emission output coefficient and γ is the economy wide average of the fraction of output forgone by all firms.
τE is the rate of income tax; and the entire tax revenue is spent for abatement. γ fraction of total output is spent for environment
protection by all private firms. Hence the effective abatement expenditure is given by

A ¼ τE ð1  γÞY þ γY
Using all these three equations we have
 μ
τE ð1  γÞ þ γ
E¼ (4a)
xð1  γÞ

12
It is always desirable to consider environmental quality as a stock variable accumulating over time. However, this creates technical complication
by increasing the dimension of the dynamic system.
13
One can argue that instead of income tax, government can collect tax on the level of pollution generated by the firms. As we assume later, that
pollution generated due to production is a constant proportion of the output, so pollution tax is also practically levied proportionally on total output
or income. So, consideration of pollution tax instead of income tax will not make the model different.
14
A set of works assumes that the government allocates a share of tax revenues to public investment and/or to subsidise private R&D in cleaner
production technologies. See for example Bovenberg and Smulders (1995, 1996), Fullerton and Kim (2008), Chu and Lai (2014) etc. However, our
model does not consider such roles of the government. Following Economides and Philippopoulos (2008), Greiner (2005), Gupta and Barman (2009,
2010, 2013, 2015), Barman and Gupta (2010) etc., we consider government’s limited role only to finance abatement activities.

32
C. Bhattacharyya, M. Ranjan Gupta International Review of Economics and Finance 72 (2021) 29–44

μ > 0 is the elasticity of environmental quality with respect to the relative abatement performance. This environmental quality is
treated as given by a firm (consumer) to choose its capital use (consumption) plan. E is regulated by the choice of γ. The consumer and
the firm unilaterally can not choose the value of γ without caring the views of the labour union. When all firms are identical, γ ¼ γ.
However, the value of γ is determined by bargaining between the labour union and the firm’s association.
Generally, environment quality is treated as an externality to firm’s production. However, in the present case, E represents workers’
health condition to be improved by the environmental up-gradation. So it is restricted in a localised region and so it should not be treated
as a pure externality. Firms have the ability and incentive to internalise it in order to improve the productivity. However, firm’s are not
empowered to do this unilaterally without caring views of the union. Private abatement expenditure belongs to the set of those terms of
the contract over which bargaining takes place. So firms and unions while bargaining with each others internalise it as a private factor to
improve the production. Hence we may have a bargaining solution of γ when the union-firm bargaining takes place; and this gives us a
bargaining solution of E, given the tax rate.
Equation (4.a) shows that E is a function of τ as well as of γ. The tax rate, τ, is determined by the government and γ is determined by
bargaining. So, in order to endogenise the level of environmental quality, we need integration of tax policy of the government and the
union’s concern for environment.

2.4. Labour union’s utility function

The labour union derives utility from three arguments: (i) worker’s income gain measured by the difference between bargained wage
rate and the competitive wage rate,15 (ii) level of employment and (iii) degree of the friendliness between production technology and
the environment. The third argument is represented by the opportunity cost of doing that, i.e., by the share of output that the firm
forgoes to protect the environment. The third argument is generally not considered in the labour union’s utility function in the existing
literature. The utility function is given by16

uT ¼ ðw  wc Þε1 Lε2 γ ε3 with εj > 0 for j ¼ 1; 2; 3 (5)

Here uT and wc stand for the utility level of the labour union and the competitive wage rate respectively. ε1 , ε2 and ε3 are three non-
negative parameters representing degrees of orientation of the labour union towards those three corresponding arguments. If εj ¼
Maxfε1 ; ε2 ; ε3 g, then the labour union is called jth argument oriented. This definition of argument orientation is common in the
literature17. When εj ¼ εi ¼ 1 for all j and i, the union is called neutral. Otherwise the preference structure is biased. We want to analyse
how the nature of argument orientation bias in the preference structure of the labour union affects employment, growth and welfare. We
define labour union to be highly employment oriented when ε2 > ε1 þ ε3 .
It may be noted that the effects of unions’ concern about environment may differ from sector to sector and so the value of ε3 will
differ accordingly. For example, in a sector well established with workers’ health and safety programme, unions’ concern about
environment is negligible; and hence ε3 takes a very small value in that case. However, ε3 takes a high value when the sector is less
established in such programme. Accordingly, nature of the bargaining solution will differ from sector to sector. In less developed
countries, a large part of output is produced in the unorganised sector which is less established with workers’ health and safety
programme.
In a competitive labour market, the perfectly flexible wage rate is equated to the marginal productivity of labour and labour is fully
employed. In the absence of a labour union, the firm is not forced to forgo any output for environment protection. Hence γ ¼ 0 for a
competitive firm. So, with labour endowment being normalised to unity, we have
1α
wc ¼ βK α K Eδ (6)

2.5. The ‘Efficient Bargaining’ model

In the ‘Efficient Bargaining’ model, the wage rate, level of employment and the degree of environmental friendliness of production
technology are determined at each point of time jointly by the labour union and the employer’s association. They maximise the
‘generalised Nash product’ function given by

ψ ¼ ð uT  uT Þθ ðπ  π Þð1θÞ (7)

15
Some articles assume that the difference between the bargained wage rate and the unemployment benefit is an argument in the labour union’s
utility function. Contrary to this, Irmen and Wigger (2002/2003), Lingens (2003a) and Lai and Wang (2010) assume that the difference between the
bargained wage rate and the competitive wage rate is an argument in the labour union’s utility function. Since the provision of unemployment benefit
is not considered in this model, so we incorporate the difference between the bargained wage rate and the competitive wage rate perceived by the
labour union as an argument in the labour union’s utility function.
16
The Stone-Geary form of utility function of labour union is very common in the literature. See for example, Lai and Wang (2010), Grieben and
Sener (2012), Ji et al. (2016), Corneo and Marquardt (2000), Chang et al. (2007), Gori and Fanti (2009), Fanti and Gori (2011), Bhattacharyya and
Gupta (2015, 2016), Maiti and Bhattacharyya (2020), Chang and Hung (2016) etc.
17
See for example Chang et al. (2007), Bhattacharyya and Gupta (2015, 2016) etc. In those models, ε3 ¼ 0.

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C. Bhattacharyya, M. Ranjan Gupta International Review of Economics and Finance 72 (2021) 29–44

This bargaining solution along with the values of output, profit and rental rate on capital with given capital stock represents the short
run equilibrium in the unionised economy. Here uT and π symbolise the reservation utility level of the labour union and the reservation
profit level of the firm respectively. Following Lai and Wang (2010) and Chang et al. (2007), we assume that bargaining disagreement
stops production and hence results in zero employment, which, in turn, implies that uT ¼ 0 and π ¼ 0. θ 2 ð0; 1Þ represents the relative
bargaining power of the labour union. Unionisation in the labour market implies an exogenous increase in the value of θ. There is no
bargaining over the use of capital; and the firm unilaterally determines the amount of capital use. The firm and the labour union bargain
over whatever is left after paying the rental cost on capital. So we incorporate equation (3) in equation (2) and obtain

π ¼ ð1  γÞð1  αÞY  wL (8)

Finally, using equations (5), (7) and (8), we obtain

ψ ¼ fðw  wc Þε1 Lε2 γ ε3 gθ fð1  γÞð1  αÞY  wLgð1θÞ (9)

Here ψ is to be maximised with respect to w, L and γ. K is treated as given. Using equations (1) and (6), and the three first order
conditions of optimisation, we solve for bargained values of w, L and γ. These are given by18
 1
ð1  αÞfβð1  θ þ θε1 Þ  θðε1  ε2 Þg 1β
L* ¼ (10)
βfð1  θ þ θε2 Þ þ θε3 ð1  βÞg

fβð1  θÞ þ θε2 gwc

w* ¼ (11)
fβð1  θÞ þ θε2  θε1 ð1  βÞg

and

θε3 ð1  βÞ
γ* ¼ (12)
ð1  θ þ θε2 Þ þ θε3 ð1  βÞ

Equation (12) clearly shows that γ * varies positively with ε3 . In a sector which is more (less) established with health and safety
programmes of workers, ε3 takes a lower (higher) value; and hence the union will bargain less (more) for environment protection in this
case. On the other hand, equation (11) shows that the bargained wage rate is independent of the value of ε3 . So, raising the wage rate
through bargaining is not a solution to the problem of unions’ concern for workers’ health and working safety. To ensure the positive
values of L* and w* and to ensure L* < 1, we need a parametric restriction. This is given by

αβð1  θ þ θε1 Þ þ θε3 βð1  βÞ

Condition A :  βð1  θ þ θε1 Þ < θðε2  ε1 Þ < :
ð1  α  βÞ
This Condition A implies that the labour union’s preference towards wage hike can not be very high or very low relative to its
preference towards employment. This condition is always satisfied when ε1 ¼ ε2 ¼ ε3 ¼ 1. In this case, Condition A is modified as

αβ þ θβð1  βÞ
 β < 0< :
ð1  α  βÞ
Now, from equation (10), we obtain

∂L* ½ε2  ε1  βε3 L*

¼ (10a)
∂θ fð1  θ þ θε2 Þ þ θε3 ð1  βÞgfβð1  θ þ θε1 Þ  θðε1  ε2 Þg

Here the denominator in the R.H.S. of equation (10.a) is always positive. So ∂∂Lθ > 0 if and only if ε2 > ε1 þ βε3 . Here, 0 < β < 1; and so
*

ε2 > ε1 þ ε3 ⇒ ε2 > ε1 þ βε3 . So a high degree of employment orientation is a sufficient condition to ensure that unionisation generates a
positive effect on employment. If ε1 ¼ ε2 ¼ ε3 ¼ 1, then

∂L* L*
¼ <0
∂θ f1 þ θð1  βÞg
So unionisation lowers the employment level when the labour union is neutral. This is an interesting finding as compared to the
corresponding one obtained from Chang et al. (2007). In Chang et al. (2007), unionisation in the labour market does not affect the
employment level when the union is neutral. Equation (10) also shows that the level of employment, L* , varies inversely with ε3 . So the
union bargains for a higher (lower) level of employment when it is less (more) concerned with environment.
 
Chang et al. (2007) does not consider the labour union’s concern about environmental protection; hence ε3 ¼ 0. So sign of ∂∂Lθ
*

depends solely on the sign of ðε2  ε1 Þ. So in their analysis, neutrality is a necessary as well as a sufficient condition to ensure that

18
See Appendix A for derivation.

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C. Bhattacharyya, M. Ranjan Gupta International Review of Economics and Finance 72 (2021) 29–44

employment effect is nil. However, in our analysis, ε3 ¼ 1 when the union is neutral; and so the employer faces an additional cost of
introducing less productive eco-friendly technology. So labour productivity is lower; and hence an employer lowers the level of
employment following unionisation when the union is neutral.
The intuition behind this can be explained as follows. When the bargaining power of the union is increased, the labour union wants
to raise employment if it obtains a marginal utility higher than its marginal opportunity cost. In the case of Chang et al. (2007), i.e. in the
absence of labour union’s concern for environmental protection, the opportunity cost of raising L is same as the loss in utility from not
raising w. However, in the present model, this opportunity cost also depends on the loss in utility from not raising γ because ε3 > 0. So,
for a neutral labour union, this marginal opportunity cost exceeds the marginal utility; and this explains a fall in employment due to
unionisation.
Equation (11) shows that the negotiated wage rate, w* , exceeds wc . From this equation, we obtain

∂w* fβε1 ð1  βÞgwc

¼ >0 (11a)
∂θ fβð1  θÞ þ θε2  θε1 ð1  βÞg2

So w* varies positively with θ and this result is independent of the nature of orientation of the union. This is a very standard result
because the labour union always derives higher utility from a higher wage; and so it bargains for a higher wage with a greater bargaining
power.
From equation (12), we obtain

∂γ * ε3 ð1  βÞ
¼ > 0 for ε3 > 0 (12a)
∂θ fð1  θ þ θε2 Þ þ θε3 ð1  βÞg2
Unionisation forces the firm to choose a more environment friendly technology because the labour union always derives higher
utility from a better quality of environment.
Second order conditions of maximisation of ψ are also satisfied19; and we now state the following proposition.
Proposition 1. (i) Unionisation in the labour market always raises wage rate as well as the firm’s share of forgone output to protect the
environment. However, it raises employment if and only if the union is highly employment oriented; and it lowers employment even when the union
is neutral. (ii) A higher degree of orientation of the union toward environment leads to a lower level of employment and a larger share of forgone
output of the firm to protect the environment. However, the wage rate is independent of this orientation.
The effects summarised in the Proposition 1 are the short run equilibrium effects of this model. These effects are obtained at each point of time
with a given stock of capital. It may be noted that unemployment equilibrium does not arise in a competitive labour market where flexible wage rate
is determined by the marginal productivity of labour, i.e., by equation (6).

2.6. Households

The representative household derives instantaneous utility from consumption of the final good as well as from environmental
quality.20,21 For the sake of simplicity, we consider the following functional form22

Uðc; EÞ ¼ lnðcEΔ Þ with Δ > 0

c denotes the level of consumption of the household. Δ > 0 parameter signifies that her marginal utility of environmental quality is
always positive. She maximises her discounted present value of instantaneous utility over an infinite time horizon subject to the
intertemporal budget constraint. All factors of production belong to the representative household; and, as a result, all factor incomes
accrue to her. The household saves whatever is left after consumption from the disposable income. This dynamic optimisation problem is
given by the following.
Z ∞
Max lnðcE Δ Þeρt dt ; Δ>0 (13)
0

subject to,

b c ;
K_ ¼ ð1  τE Þð1  γÞ Y and Kð0Þ ¼ K0 (14)
Here c is the control variable and K is the state variable. K0 is historically given. E is an externality to the optimisation problem of the
household even though it can be internalised by firm-union bargaining. ρ is the constant rate of discount. Savings is always invested; and
capital does not depreciate.

19
See Appendix A for derivation.
20
We assume that households supply constant amount of labour; and so labour - leisure choice of representative household is ruled out.
21
There exists a set of literature which empirically shows the negative impact of pollution on human health. See for example, Schlenker and Walker
(2016), Chay and Greenstone (2003), Currie and Neidell (2005), Dockery et al. (1993), Pope et al. (2002) etc.
22
Byrne (1997), Fullerton and Kim (2008) etc. also consider similar functional form of household’s utility.

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C. Bhattacharyya, M. Ranjan Gupta International Review of Economics and Finance 72 (2021) 29–44

Solving this dynamic optimisation problem, we obtain the growth rate of consumption; and it is given by
 1α
c_ K
g ¼ ¼ ð1  τE Þð1  γÞα Lβ E δ  ρ (15)
c K

2.7. Steady state equilibrium

At the symmetric equilibrium, K ¼ K and γ ¼ γ; and hence, from equations (3), (6) and (15), we obtain

r ¼ ð1  γÞαLβ Eδ ; (3a)

wc ¼ βKEδ ; (6a)

and

c_
g ¼ ¼ ð1  τE Þð1  γÞαLβ Eδ  ρ (15a)
c
Since this is an AK model, so there are no transitional dynamics here. As a result, the economy is always in a steady state which
represents the long run equilibrium of the model. In the steady state balanced growth equilibrium, employment of labour, tax rate, rental
rate of capital, environmental quality and firm’s share of forgone output - all are time-independent. So the growth rate of consumption
given by equation (15.a) is also time-independent. However, capital stock, K, final output, Y, negotiated wage rate w* , firm’s profit, π ,
grow over time; and their common rate of growth is equal to the rate of growth of consumption. However, full employment is not
ensured in this balanced growth equilibrium. Steady state level of employment is equal to the bargained level of employment.

3. Growth maximising tax rate versus welfare maximising tax rate

A benevolent government should be interested to maximise the welfare of the households. However, for technical complexity, we do
not derive welfare maximising tax rate analytically. Rather, we first derive the growth rate maximising tax rate and then check the
equivalence between the welfare maximising tax rate and the growth rate maximising one. In order to derive the growth rate max-
imising tax rate, τE * , we use equation (4.a) and (15. a) to maximise g and thus obtain23
 
μδð1  γ * Þ  γ *
τE * ¼ (16)
ð1 þ μδÞð1  γ * Þ

Equation (16) implies that the growth rate maximising tax rate, τE * , varies inversely with the firm’s rate of output sacrifice, γ * . This
inverse relationship clearly justifies that the union’s concern for environment and the tax policy of the government should be studied
simultaneously in the same model. In order to ensure that τE * > 0, we assume

γ* θε3 ð1  βÞ
μδ > ¼ (16a)
ð1  γ * Þ ð1  θ þ θε2 Þ
Using equations (12) and (16), we obtain
 
μδð1  θ þ θε2 Þ  θε3 ð1  βÞ
τE * ¼ <1
ð1 þ μδÞð1  θ þ θε2 Þ
From equation (16.a), we obtain

∂τE * ε3 ð1  βÞ
¼ <0 (17)
∂θ ð1  θ þ θε2 Þ2 ð1 þ μδÞ

Equation (17) implies that an increase in θ lowers τE * . So unionisation in the labour market lowers the growth rate maximising tax
rate. This is so because, unionisation forces firms to spend more for environment protection. This, in turn, upgrades the environmental
quality and thus lowers the marginal benefit of public abatement expenditure. So the size of the public abatement expenditure is reduced
and the government lowers the tax rate.
Now, we compare the welfare maximising tax rate to the growth rate maximising tax rate. We define welfare, ω, as the discounted
present value of instantaneous utilities of the representative household over the infinite time horizon. It is given by equation (13). After
incorporating equations (1), (4.a), (14) and (15) in equation (13), we obtain24

23
Second order condition of maximisation is also satisfied.
24
See Appendix B.

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C. Bhattacharyya, M. Ranjan Gupta International Review of Economics and Finance 72 (2021) 29–44

     
ln g α1  1 þ αρ Δμln τExð1γÞ
ð1γÞþγ
ln K0 g
ω¼ þ þ þ σ1 g þ þ σ2 (18)
ρ ρ ρ2 ρ
Here σ 1 and σ 2 are two constants of Integration. Since we do not know the sign and magnitude of σ 1 , we assume that welfare varies
positively with the growth rate. Equation (18) shows that the welfare maximising tax rate is greater than the growth rate maximising tax
rate. If we differentiate ω with respect to τE at τE ¼ τE * , then the derivative of the fifth term on the right hand side of equation (18) will be


positive, while, all other derivatives will be zero at τE ¼ τE * . So ∂τ∂ωE  > 0 in this case. The growth maximising tax rate does not take
* τE ¼τE
into account the positive effect of environmental quality on the household’s utility as it does not affect the after tax marginal product of
capital. As a result, the marginal social benefit of taxation is higher than its marginal positive effect on the growth rate. It should be also
noted that the welfare maximising tax rate is affected by the level of unionisation because unionisation affects the marginal impact of
public abatement expenditure by changing γ * . We summarise the main results in the following proposition.
Proposition 2. The growth rate maximising rate of income tax used to finance public abatement expenditure varies inversely with the relative
bargaining power of the labour union. The welfare maximising tax rate is greater than the growth rate maximising tax rate.

4. Growth and welfare effect of unionisation

We now analyse the effect of an exogenous increase in the relative bargaining power of the union, θ, on the endogenous growth rate.
Using equation (4.a), (16) and (15. a) and putting γ ¼ γ * and L ¼ L* , we obtain
β
αL* ðμδÞμδ
g* ¼ μδþ1 μδ ρ (19)
ð1 þ μδÞ fxð1  γ * Þg
From equation (19), we have
8 9
∂g * ∂L* >
< ∂γ * >
=
∂θ ∂θ ∂θ
¼β þ μδ (20)
ρ þ g* L* :ð1  γ Þ>
> *
;

Equation (20) shows that the effect of an increase in θ on the growth rate, g * , is ambiguous. The first term on the right hand side of
equation (20) represents the employment effect on growth due to unionisation. Its sign is determined by the sign of ∂∂Lθ ; and so it depends
*

on the nature of the labour union’s orientation towards the arguments in its utility function. This employment effect is positive when the
union is sufficiently employment oriented. However, the second term on the right hand side of equation (20) captures the environment
protection effect on growth due to unionisation; and it is definitely positive. So a high degree of employment orientation bias in the
preference structure of the union is a sufficient condition to ensure that unionisation generates a positive effect on the economic growth
rate.
From equation (19), we also have
8 9
>
> >
>
∂g * ∂L* < ∂γ * =
∂ε3 ∂ε3 ∂ε3
¼β þ μδ (20b)
ρ þ g* L* >
>ð1  γ * Þ>
>
: ;

Using equations (10), (12) and (20b), we obtain

∂g *
∂ε3 θ½  β þ μδð1  βÞ
¼ (20c)
ρ þ g* ½ð1  θ þ θε2 Þ þ θε3 ð1  βÞ
∂g * β
This equation (20c) shows that ∂ε3 < 0 for μδ < ð1βÞ. Here 0 < μδ < 1. Douglas (1976) shows that β > 0:5. So, with β > 0:5, the
growth effect of increase in the union’s preference towards environment protection is negative.
In case of a neutral labour union, i.e., with ε1 ¼ ε2 ¼ ε3 ¼ 1, the growth effect of unionisation is obtained using equations (12) and
(20a) and (10. a). It is given by

∂g *
∂θ μδð1  βÞ  β
¼ (20a)
ρ þ g* f1 þ θð1  βÞg
∂g * β
This equation (20a) shows that ∂θ < 0 for μδ < ð1βÞ. Here 0 < μδ < 1. Douglas (1976) shows that β > 0:5. So, with β > 0:5 the
growth effect of unionisation is always negative in this case.
In Chang et al. (2007), labour union’s concern about environmental protection is absent. As a result, the environment protection
effect on growth does not exist there. Moreover, the growth effect of unionisation is qualitatively similar to the employment effect in that

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C. Bhattacharyya, M. Ranjan Gupta International Review of Economics and Finance 72 (2021) 29–44

model; and hence the existence of an employment-oriented labour union is a necessary as well as a sufficient condition to have a positive
growth effect of unionisation. However, in the present model, where unions’ concern for environment protection exists, the magnitude
of the employment orientation bias in unions’ preference function plays an important role to ensure a positive growth effect. Marginal
employment orientation bias in union’s preference structure is no longer a sufficient condition to ensure a positive growth effect of
unionisation. By marginal employment orientation, we mean ε2 ¼ Max fε1 ; ε2 ; ε3 g but ε2 < ε1 þ βε3 . In Chang et al. (2007), a rise in the
relative bargaining power of a neutral labour union has no effect on the growth rate. However, this produces a negative growth effect in
the present model.
The existing empirical literature also shows substantial evidences of an ambiguous relationship between unionisation and the
economy’s growth rate. Empirical studies by Kim (2005), Vedder and Gallaway (2002), Padovano and Galli (2003), Carmeci and Mauro
(2003) and Adjemian et al. (2010) show that labour unions have a negative impact on economic growth. However, Georgiou (2010) and
Asteriou and Monastiriotis (2004) show that a positive association exists between unionisation and economic growth rate. Jaoul--
Grammare and Terraz (2013) uses data from 11 European countries for the period 1960–2009; and finds that, only in the case of France,
union density positively affects economic growth. For all other countries, the effect of union density on economic growth rate is not
statistically significant. Traxler and Brandl (2009) uses data covering 18 countries for the time period from 1980 to 2000; and concludes
that labour unions’ bargaining power does not have any significant impact on the growth rate of GDP.
Equation (18) shows that unionisation affects welfare level through the channel of growth as well as through the channel of
 
environmental protection. The environmental quality depends on τExð1γÞ ð1γÞþγ
. Since we can not analytically derive the welfare max-
 
imising tax rate, we use the growth rate maximising tax rate to analyse the effect of unionisation on τExð1γÞ
ð1γÞþγ
. Using equation (16), we
have
 
τE * ð1  γ * Þ þ γ * μδ
¼ (21)
xð1  γ * Þ ð1 þ μδÞð1  γ * Þx
 
τE * ð1γ * Þþγ *
xð1γ * Þ
varies positively with unionisation because γ * varies positively with unionisation25. As a result, the welfare level, ω,
definitely varies positively with unionisation in case of a highly employment oriented labour union when the growth effect of union-
isation is non-negative. However, even if unionisation does not raise the growth rate, then also it may have a positive effect on welfare
level through its positive effect on environmental quality. This establishes the following proposition.
Proposition 3. A high degree of employment orientation in the preference structure of labour union is a sufficient condition to ensure a positive
growth effect as well as a positive welfare effect. Moreover, due to the positive environment protection effect, growth effect of unionisation may be
positive even if its employment effect is negative, and, welfare effect of unionisation may be positive even if its growth effect is negative. Un-
ionisation is always harmful to growth when the labour union is neutral. Increase in the union’s preference towards environment protection has a
negative effect on the growth rate.

5. Non unionised labour market

By non unionised labour market, we mean a competitive labour market with wage flexibility and full employment. Here firms do not
bear environment protection cost. So, in this case, γ ¼ 0; and hence from equation (3) we have

Y 1α
r¼α ¼ αK α1 K Eδ (3.1)
K
This equation (3.1) represents capital market equilibrium condition. Also, from equation (6), we have
1α
w ¼ wc ¼ βK α K Eδ (6.1)

and, from equation (4.a), we have

τ
μ
E
E¼ (4.a.1)
x
In the symmetric equilibrium, K ¼ K; and hence
τ
μδ
r¼α
E
x

and

25
See equation (12.a).

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C. Bhattacharyya, M. Ranjan Gupta International Review of Economics and Finance 72 (2021) 29–44

τ
μδ
E
w¼β K
x
The profit of the firm is given by
τ
μδ
π ¼ ð1  α  βÞ E
K
x
In the steady-state equilibrium, c, w, K and π grow at the same rate. The rate of growth of consumption, c, derived from the behaviour
of the household is now given by

c_ τ
μδ
g ¼ ¼ ð1  τE Þα ρ
E
(15.a.1)
c x
Here the government maximises the growth rate, g, with respect to the tax rate, τE ; and, from the first order condition, we have

μδ
τE ** ¼
1 þ μδ

This is a special case of equation (16) with γ * ¼ 0. So τE ** is the growth rate maximising tax rate in an economy with a non-unionised
labour market; and comparing this equation to equation (16), it can be shown that

γ*
τE * ¼ τE ** 
ð1 þ μδÞð1  γ * Þ
Here τE * < τE ** when 0 < γ * < 1. However, τE * ¼ τE ** when γ * ¼ 0. This implies that the government imposes a lower tax rate in a
unionised economy than that in the competitive economy when the union has a direct concern for worker’s health and working safety.
However, the tax rate is same in both the cases when union does not care for workers’ health and working safety. This leads to the
following proposition.
Proposition 4. The growth rate maximising tax rate in a competitive economy exceeds (is equal to) that in a unionised economy when the
labour union bargains (does not bargain) with the firm for an environment friendly technology.
The intuition behind the result is very simple. In the unionised economy, there are two sources to finance the abatement expenditure – firms’
expenditure and government expenditure; and these two are substitutes. However, in the competitive economy, government expenditure is the only
source. So the government needs to spend more in a competitive economy; and so a higher tax rate is required in that case. This result has an
important implication while analysing the union’s concern for environment and tax policy of the government in a single model.

6. Conclusions

The present paper investigates the effect of unionisation in the labour market on the employment level, growth rate and welfare level
of an economy in the presence of the labour unions’ concern about workers’ health, safety and environment protection. This paper also
derives properties of the optimum income tax policy designed to finance public abatement expenditure. Integration of these two issues in
a single paper is interesting and important because environment protection expenditure of private firms and the public abatement
expenditure of the government are substitutes to each other. We use an ‘Efficient Bargaining’ model following McDonald and Solow
(1981) to represent the negotiation process between the firm and the labour union; and this bargaining solution leads to an unem-
ployment equilibrium at each point of time. We then incorporate it in a dynamic AK model of endogenous growth where growth is
engineered by the positive external effect of capital accumulation, i.e., by the learning by doing effect of Arrow (1962). We find balanced
growth of relevant macroeconomic variables in the long run equilibrium. However, this balanced growth equilibrium does not ensure
full employment in the labour market in the presence of unionisation. On the other hand, power of the union and its nature of orientation
towards employment in its preference structure not only determines the level of unemployment but also determines the rate of growth as
well as the level of welfare.
Our major findings can be summarised as follows. First, in the short run, the negotiated wage rate as well as the firm’s rate of output
sacrifice to protect the environment varies positively with the degree of unionisation in the labour market. Secondly, the growth rate
maximising rate of income tax used to finance public abatement expenditure varies inversely with the bargaining power of the labour
union because public abatement expenditure and firms’ environment protection expenditure are substitute to each others to ensure a
given level of environmental quality. Thirdly, this tax rate in a competitive economy is greater than (equal to) that in the unionised
economy when the union does (does not) concern for environment protection. This result clearly explains why a study of tax policy of
the government is interesting in the presence of the union’s concern for environment when government spends tax revenue to finance
abatement expenditure. If the tax revenue is not used to finance abatement activities, the analysis of tax policy is not at all interesting in
this case.
We now turn to summarise the results related to the effects of unionisation on employment, growth and welfare. We find that a high
employment orientation bias in the preference structure of the labour union appears to be a sufficient condition to have a positive effect
of unionisation on employment level, economic growth rate as well as on the level of welfare. However, a rise in the bargaining power of
a neutral labour union is harmful for employment and growth. The effect of unionisation on growth may be positive even if its
employment effect is negative; and its welfare effect may be positive even if its growth effect is negative. These results are obtained due

39
C. Bhattacharyya, M. Ranjan Gupta International Review of Economics and Finance 72 (2021) 29–44

to the consideration of labour unions’ concern about workers’ health, safety and environment protection. The importance of the positive
environment protection effect of unionisation in the labour market is not discussed in the existing theoretical literature; and as a result,
many of these results are new finding in the literature on unionisation and economic growth. Moreover, some results of Chang et al.
(2007) appear to be special cases of our results obtained in the absence of environment protection effect. In Chang et al. (2007), these
three effects – employment effect, growth effect and welfare effect always move in the same direction. However, we should admit that
our exercise does not provide an alternative theory of endogenous growth. We focus only on the role of the orientation bias of the union
in its preference structure to determine the effect of unionisation on growth rate and welfare level. Our results are important in that
branch of literature which studies the effect of unionisation on economic growth.
Nevertheless, our model can be extended in various directions. Environmental quality may be considered as a stock variable
accumulating over time; and hence the interaction between environmental pollution and technological progress can be incorporated.
That entire tax revenue is allocated to abatement activities is a restrictive assumption; and allocation of government’s budget towards
education, R&D etc. should be analysed in a more meaningful exercise. The assumption of a ‘closed shop union’ may be replaced by an
‘open shop union’, which is more common in reality. Incorporation of union’s membership dynamics and its intertemporal behaviour in
the analysis may also provide a deeper understanding of this issue. Since we assume that both private firms and the government do
abatement activity independently, there may appear a coordination problem between these two parties. Further research is required to
address these topics.

CRediT authorship contribution statement

Chandril Bhattacharyya: Conceptualization, Methodology, Formal analysis, Resources, Writing - original draft, Writing - review &
editing, Visualization. Manash Ranjan Gupta: Conceptualization, Methodology, Formal analysis, Resources, Writing - original draft,
Writing - review & editing, Supervision.

Appendix A. ‘Efficient Bargaining’ model

First order conditions:

From equations (9) and (1), we have

logψ ¼ θε1 logðw  wc Þ þ θε2 logL þ θε3 logγ

 
1α
þð1  θÞlog ð1  γÞð1  αÞK α Lβ K Eδ  wL (A.1)

The first order conditions of maximisation of log ψ are given by the followings.

θε1 ð1  θÞð  LÞ
þ ¼0 (A.2)
w  wc fð1  γÞð1  αÞK α Lβ K 1α Eδ  wLg

1α
θε2 ð1  θÞfð1  γÞð1  αÞβK α Lβ1 K Eδ  wg
þ 1α
¼0 (A.3)
L fð1  γÞð1  αÞK α Lβ K Eδ  wLg

and
1α
θε3 ð1  θÞf  ð1  αÞK α Lβ K Eδ g
þ 1α ¼0 (A.4)
γ fð1  γÞð1  αÞK α Lβ K Eδ  wLg
Now using equations (A.2), (A.3) and (6), we have

ðε1  ε2 Þw ¼ ε1 ð1  γÞð1  αÞLβ1 wc  ε2 wc (A.5)

From equations (A.2) and (6), we obtain
n wc o
θε1 ð1  γÞð1  αÞLβ1  w ¼ ð1  θÞðw  wc Þ (A.6)
β
Using Equations (A.5) and (A.6), we obtain

βθε2 þ βð1  θÞ
Lβ1 ¼ (A.7)
ð1  γÞð1  αÞfβð1  θÞ þ βθε1  θðε1  ε2 Þg
From equation (A.4), we obtain

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C. Bhattacharyya, M. Ranjan Gupta International Review of Economics and Finance 72 (2021) 29–44

1α
θε3 ð1  θÞfð1  αÞK α Lβ1 K Eδ g
¼ 1α (A.8)
γ fð1  γÞð1  αÞK α Lβ1 K Eδ  wg
Using equations (A.5), (A.7), (A.8) and (6), we obtain

f1  βgθε3
γ¼ (A.9)
fθε2 þ ð1  θÞg þ θε3 f1  βg
Equation (A.9) is identical to equation (12) in the body of the article.
Using equations (A.9) and (A.7), we have

β½θε2 þ ð1  θÞ þ θε3 f1  βg

Lβ1 ¼ (A.10)
ð1  αÞfβð1  θÞ þ βθε1  θðε1  ε2 Þg
From equation (A.10), we obtain equation (10) in the body of the article.
Using equations (A.7) and (A.5), we have

βð1  θÞ þ θε2
w¼ wc (A.11)
fβð1  θÞ þ βθε1  θðε1  ε2 Þg
Equation (A.11) is identical to equation (11) in the body of the article.
Derivation of Condition A:
We derive Condition A as follows. To ensure the positive values of L* and w* , we need the following parametric restriction.

Condition A1 : βð1  θ þ θε1 Þ > θðε1  ε2 Þ

Again, labour employment has to be less than its endowment i.e., L* < 1; and so the following parametric restriction is needed.

Condition A2 : ð1  α  βÞθðε2  ε1 Þ < αβð1  θ þ θε1 Þ þ θε3 βð1  βÞ

Combining these two conditions A1 and A2 , we obtain condition A given in the body of the article.
Second order conditions:
Using equations (A.2) and (6), we have

∂2 Logðψ Þ θε1 ð1  θÞ
¼ n o2 < 0 (A.12)
∂w2 ðw  wc Þ2 ð1  γÞð1  αÞLβ1 wc  w β

From equations (A.3), (6), (A.7) and (A.11), we have

28 93
> ð1  γÞð1  αÞð1  βÞwc Lβ1 ð1  βÞð1  θÞwc >
< =
6 fβð1  θÞ þ βθε1  θðε1  ε2 Þg 7
6 7
6>
:  2 >
;7
∂ Logðψ Þ
2
θε2 6 þ ð1  γÞð1  αÞL β1
 7
6 wc w 7
¼   ð1  θÞ 6 n o 7<0 (A.13)
∂L2 L2 6
ð1  γÞð1  αÞLβ wβc  wL
2
7
6 7
6 7
4 5

From equations (A.4) and (6), we have

n o2
∂2 Logðψ Þ θε3 ð1  θÞ ð1  αÞLβ1wβc
¼   n o2 < 0 (A.14)
∂γ 2 γ2
ð1  γÞð1  αÞLβ1 wc  w
β

Now, using equations (A.12), (A.11) and (A.7), we have

∂2 Logðψ Þ fβð1  θÞ þ βθε1  θðε1  ε2 Þg2 ð1  θ þ θε1 Þ

¼  (A.15)
∂w2 wc 2 ð1  βÞ2 θε1 ð1  θÞ
Using equations (A.13), (A.11) and (A.7), we have

∂2 Logðψ Þ ð1  θ þ θε2 Þ½βð1  θÞ þ θε2 

¼
∂L2 L2 ð1  θÞ (A.16)

Again using equations (A.14), (A.9), (A.11) and (A.7), we have

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C. Bhattacharyya, M. Ranjan Gupta International Review of Economics and Finance 72 (2021) 29–44

∂2 Logðψ Þ ½fθε2 þ ð1  θÞg þ θε3 f1  βg2 ð1  θ þ θε3 Þ

¼ (A.17)
∂γ 2 ð1  βÞ2 ð1  θÞθε3
Now from equations (A.2), (A.7), (A.11) and (6), we have

∂2 Logðψ Þ ½1  θ þ θε2 fβð1  θÞ þ βθε1  θðε1  ε2 Þg

¼ (A.18)
∂L∂w Lð1  θÞwc ð1  βÞ
Using equations (A.15), (A.16) and (A.18), we have
 2
∂2 Logðψ Þ ∂2 Logðψ Þ ∂2 Logðψ Þ
: 
∂L2 ∂w 2 ∂L∂w

fβð1  θÞ þ θε2  θε1 ð1  βÞg3 ½θε2 þ ð1  θÞ

¼ >0 (A.19)
L2 wc 2 ð1  βÞ2 ð1  θÞθε1
Again from equation (6), (A.3), (A.7), (A.10) and (A.11), we have

∂2 Logðψ Þ ½βð1  θÞ þ θε2 ½θε2 þ ð1  θÞ þ θε3 f1  βg

¼ <0 (A.20)
∂L∂γ Lð1  θÞð1  βÞ

and from equation (6), (A.2), (A.7), (A.11), we have

∂2 Logðψ Þ fβð1  θÞ þ θε2  θε1 ð1  βÞg½θε2 þ ð1  θÞ þ θε3 f1  βg

¼
∂γ ∂w ð1  θÞwc f1  βg2

<0 (A.21)
From equations (A.18), (A.15), (A.21) and (A.20), we have

∂2 Logðψ Þ ∂2 Logðψ Þ ∂2 Logðψ Þ ∂2 Logðψ Þ

:  :
∂L∂γ ∂w2 ∂L∂w ∂w∂γ

 
fβð1  θÞ þ θε2  θε1 ð1  βÞg3 ½θε2 þ ð1  θÞ þ θε3 f1  βg
¼ >0 (A.22)
θε1 ð1  θÞLð1  βÞ3 wc 2
From equations (A.18), (A.20), (A.16) and (A.21), we have

∂2 Logðψ Þ ∂2 Logðψ Þ ∂2 Logðψ Þ ∂2 Logðψ Þ

:  : ¼0 (A.23)
∂L∂w ∂L∂γ ∂L2 ∂w∂γ
So from equations (A.17), (A.19), (A.20), (A.22), (A.21) and (A.23), we have
(     2 )      
∂2 Logðψ Þ ∂2 Logðψ Þ ∂2 Logðψ Þ ∂2 Logðψ Þ ∂2 Logðψ Þ ∂2 Logðψ Þ ∂2 Logðψ Þ ∂2 Logðψ Þ ∂2 Logðψ Þ
:   :  :
∂γ 2 ∂w2 ∂L2 ∂w∂L ∂γ ∂L ∂w2 ∂γ ∂L ∂w∂L ∂γ ∂w
     
∂2 Logðψ Þ ∂2 Logðψ Þ ∂2 Logðψ Þ ∂2 Logðψ Þ ∂2 Logðψ Þ
þ :  :
∂γ ∂w ∂w∂L ∂γ ∂L ∂L2 ∂γ ∂w

½θε2 þ ð1  θÞ þ θε3 f1  βg3 fβð1  θÞ þ θε2  θε1 ð1  βÞg3

¼  <0 (A.24)
θ2 ε3 ε1 wc 2 L2 ð1  βÞ4 ð1  θÞ

Appendix B. ‘Derivation of equation (18)

From equation (13), we obtain

Z ∞
ln c0 g Δln E
ω¼ lnðcE Δ Þeρt dt ¼ þ þ σ1 g þ þ σ2 (B.1)
0 ρ ρ2 ρ

where c ¼ c0 egt and c0 is the consumption at time point 0. Now, using equations (1) and (14), we obtain

c0 ¼ K0 ½ð1  τE Þð1  γÞLβ Eδ  g (B.2)

42
C. Bhattacharyya, M. Ranjan Gupta International Review of Economics and Finance 72 (2021) 29–44

From equation (15), we obtain

gþρ
¼ ð1  τE Þð1  γÞLβ Eδ (B.3)
α
Using equations (B.1), (B.2), (B.3) and (4. a), we obtain equation (18) in the body of the article.

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