The Existence of an Involuntary Unemployment Equilibrium

Masayuki Otaki

Chapter 3 in Keynesian Economics and Price Theory, 2015, pp 45-52 from Springer

Abstract: Abstract This chapter proves the existence of involuntary unemployment involuntary unemployment not otherwise caused by the monopsony of incumbent employees. The efficient bargaining model developed by McDonald and Solow Solow plays an important role. Their theory depicted wage bargaining as Pareto-efficient allocations concerning the real wage and the employment level. However, such a negotiation structure presumes that the bargaining game is a simultaneous move. This assumption implies that even unemployed workers agree with the result. In this sense, unemployment is voluntary in that theory. The model in this chapter decomposes the negotiation process into a two-stage game. At the first stage, an employer decides the employment/output level. Given that result, employer and employees negotiate the nominal wage in a second stage. Given that the best response for the employer is to produce as many goods as possible, when the result of this second-stage game and the equilibrium nominal wage exceed the reservation level, unemployment is involuntary in the sense of Keynes Keynes .

Keywords: Involuntary unemployment; Efficient wage bargaining; Perfect equilibrium (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advchp:978-4-431-55345-8_3

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DOI: 10.1007/978-4-431-55345-8_3

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