Wage setting and unemployment in a general equilibrium model

Michele Gori and Antonio Villanacci ()
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Antonio Villanacci: Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze

No 2012-04, Working Papers - Mathematical Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

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 definition insures full employment, with the assumption that wages depend on employment and a variable representing all the other exogenous factors influencing 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 firms 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 profits. That result suggests what are the effects of a large variety of policies analyzed in the current debate on the role of labour market institution.

Keywords: unemployment; wage setting function; income distribution; general equilibrium. (search for similar items in EconPapers)
JEL-codes: C72 D31 D51 J21 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2012-06
New Economics Papers: this item is included in nep-lab
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