Economic Reforms, Frictional Unemployment and Wage Inequality-----A General Equilibrium Analysis

Titas Kumar Bandopadhyay

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper we extend the benchmark model of Diamond-Mortensen-Pissarides in a two-sector general equilibrium framework by introducing a frictionless segment of the labour market. The two sectors are the frictionless informal sector and the frictional formal sector where match friction is the root cause of unemployment. Here,both wages are flexible. Informal wage is determined by the marginal productivity rule of the worker and the formal wage is determined by the Nash-bargaining solution. We alsoexamine the effects of trade reforms and labour market reforms on equilibrium rate of unemployment and wage inequality in our stylitzed economy. We find that both these reforms reduce equilibrium rate of unemployment. However, trade reforms raise wage inequality but labour market reforms reduce it. These results provide a strong theoretical basis for labour market reform in a small open economy characterized by frictional labour market.

Keywords: Economic reforms; Frictional unemployment; Wage inequality; Jobsearching; Job-matching; General equilibrium. (search for similar items in EconPapers)
JEL-codes: F6 F66 J6 (search for similar items in EconPapers)
Date: 2014-11-10
New Economics Papers: this item is included in nep-dge, nep-iue and nep-lab
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