Imperfect Competition, Unemployment Benefit and the Non-neutrality of Money: An Example

Huw Dixon

Oxford Economic Papers, 1990, vol. 42, issue 2, 402-13

Abstract: This paper provides a simple example of a multisector unionized economy with equilibrium unemployment and for which monetary policy has a standard Keynesian multiplier. In equilibrium, unions choose a wage that is a fixed markup over the nominal unemployment benefit level, which can lead to unemployment even when benefits are below the market clearing wage, resulting in endogenously fixed nominal wages and prices. In the long run, the government can restore full employment by monetary expansion or a cut in benefits; in the short run, however, monetary expansion is a superior policy instrument for Rawlesian or utilitarian governments. There is a continuum of employment levels attainable by macroeconomic policy, and this Copyright 1990 by Royal Economic Society.

Date: 1990
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