Title: Wage setting and unemployment in a general equilibrium model
Abstract: The purpose of the paper is to argue that exogenous changes lowering wages may imply an increase of unemployment. To support that viewpoint, we use a general equilibrium approach. In that framework, we substitute the labour market clearing equation, which by very denition insures full employment, with the assumption that wages depend on employment and a variable representing all the other exogenous factors inuencing the outcome of wage setting. We assume that an increase of that variable determines a decrease of wage for any given level of employment. We further assume that rms compete strategically in the labour market. After having proved there is a unique equilibrium for each economy, we show that an increase of the above mentioned residual variable may cause in equilibrium a decrease in real wages and wage bill along with an increase in unemployment rates and prots. That result suggests what are the eects of a large variety of policies analyzed in the current debate on the role of labour market institution.
Publication Year: 2012
Publication Date: 2012-06-01
Language: en
Type: preprint
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