A new model of equilibrium involuntary unemployment

Leo Kaas () and Paul Madden ()

Economic Theory, 2004, vol. 23, issue 3, pages 507-527

Abstract: We show that equilibrium involuntary unemployment emerges in a multi-stage game model where all market power resides with firms, on both the labour and the output market. Firms decide wages, employment, output and prices, and under constant returns there exists a continuum of subgame perfect Nash equilibria involving unemployment and positive profits. A firm does not undercut the equilibrium wage since then high wage firms would attract its workers, thus forcing the undercutting firm out of both markets. Full employment equilibria are payoff dominated by unemployment equilibria, and the arguments are robust to decreasing returns. Copyright Springer-Verlag Berlin/Heidelberg 2004

Keywords: Involuntary unemployment; Multi-stage game; Imperfect competition. (search for similar items in EconPapers)
Date: 2004

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