Profit sharing, credit market imperfections and equilibrium unemployment

We investigate the interaction between labour and credit market imperfections for equilibrium unemployment in the presence of profit sharing. In a partial equilibrium with exogenous outside options, increased bargaining power of banks has adverse employment effects. In a general equilibrium with endogenous outside options, this relationship is frequently reversed; reduced credit market imperfections increase equilibrium unemployment if the labour market imperfections-measured by the bargaining power of trade unions-are sufficiently strong and the benefit-replacement ratio is sufficiently high. Finally, we show that higher bankruptcy risks increase equilibrium unemployment under similar conditions.