Impact of Demand Structure and Market Size on Unemployment, Income Inequality and Social Welfare

V. Goncharenko and Alexander Shapoval
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V. Goncharenko: National Research University Higher School of Economics, Moscow, Russia

Journal of the New Economic Association, 2018, vol. 37, issue 1, 12-33

Abstract: Using the General Equilibrium Model of the two-sector economy, the impact of consumer demand on the structure of employment, income inequality and the welfare of society is studied. It is assumed that the traditional sector is characterized by perfect competition, and single-product firms compete monopolistically in the high-tech sector and set wages as a result of negotiations with employees. In the model, labor is mobile within sectors, but not between sectors. It is shown that rise of the market`s size, the income tax rate and consumer spending on high-tech goods increases the level of unemployment in the economy. Unemployment remains at the equilibrium due to the imperfection of the labor market. Welfare shows a U-shaped dependence on consumer spending on high-tech goods. It is increasing as a fuinction of the market size and decreasing at the tax rate. In addition, with the increase in the elastisity of substitution between differentiated goods the difference between sectors declines, wages inequality disappears, the attractiveness of the high-tech sector shrinks, as far as the supply at the labor market and the unemployment level. The welfare of society is also declining. As a result, the recovery of social equality is due to the welfare of the society.

Keywords: demand structure; wage inequality; unemployment; monopolistic competition; general equilibrium (search for similar items in EconPapers)
JEL-codes: D63 E24 J64 L11 (search for similar items in EconPapers)
Date: 2018
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